Bendigo and Adelaide call puts spotlight on reverse mortgages

The idea of offering retirees cash in return for an interest in the future value of their homes has struggled to go mainstream.

Bendigo and Adelaide’s decision to change the treatment of earnings from its retiree finance activities accidentally shines a light into the world of reverse mortgages.

Despite its obvious potential in a society where there is an ageing population and a highly priced housing market, the idea of offering retirees cash in return for an interest in the future value of their homes has struggled to go mainstream until recently.

However, a substantial cutback in both pensions and part pensions introduced in January this year is widely seen as a boost for the sector, as 300,000 older Australians lost entitlements.

Financial advisers are often very sceptical of such schemes, suggesting to clients that entering “release” arrangements should be a last resort — alternatives such as taking a conventional loan or even “co-funding” with adult children are regularly put forward.

Nonetheless, two models have appeared as retirees hunt for cash income.

Home equity release schemes, such as the Bendigo and Adelaide product, see the bank take a stake in the home. The value of the stake is offered to the retiree at a discounted rate to the current valuation — when the home is sold both parties share in any upside.

Reverse mortgages are loan arrangements, rather than equity arrangements, which have been offered by banks such as St George and CBA. The client gets a regular income stream while a loan from the bank builds against the value of the property until the eventual sale, when the loan is repaid.

Both models have pros and cons. Financial adviser James Gerrard says: “If I had to make a choice between the two, it would be the Bendigo model. Under reverse mortgages you are having interest capitalised and that is rarely a good thing.”

Though Bendigo’s slice of the business in capital city markets is now large enough to partially explain the latest sell-off in the bank’s stock, analysts suggest the key impediments in the market are not from retirees but rather the limitations set by the banks. Reports from industry analysts including Deloitte and the Grattan Institute suggest the overall sector is growing by about 7 per cent a year.

Andrew Heaven, a financial adviser aligned to the AMP group, says: “These products have their place, at the same time people should always examine simple borrowing arrangements such as a line of credit if they want to compare prices for this sort of service.’’

A ruling in 2012 by the government has improved the schemes for customers. A “negative equity protection” principle now ensures that whatever may occur in the future, such as falling house valuations or enlarged loans (held by people who never realised the arrangements would last so long), the client cannot owe the relevant financial institution any more than the value of the home.