Older Australians have rushed the government’s cut-price reverse mortgage scheme

The government’s heavily discounted Home Equity Scheme has become a roaring success – the question now is how long can the current offer last?

Any older person looking to tap into the value of their family home can get the government mortgage at a set rate of 3.95 per cent. Picture: iStock

It’s been called the best-kept ­secret for older Australians, but the deep discount offered by the government’s reverse mortgage scheme is now so blatantly obvious it’s more like an open secret – participation in the scheme has boomed tenfold since 2019.

New data shows that the Home Equity Scheme – where the government offers reverse mortgages at less than half commercial rates – has changed from an obscure scheme to a mainstream product with participation figures reported in the year to March at more than 12,000 ­people, up from 700 in 2019.

And why not? Any older person looking to tap into the value of their family home can get the government mortgage at a set rate of 3.95 per cent (unchanged in the last budget).

Meanwhile, commercial rates are more than twice this level, with rates climbing towards 10 per cent. Commercial mortgages have fewer restrictions, but the ­effectively discounted rate the government offers is clearly a powerful trade-off.

The boom in reverse mort­gages (where the applicant generally sells part of their home to an institution in return for regular income) was always going to happen with the escalation of house prices occurring while owner-occupiers on fixed incomes were facing inflation.

But the take-up has been accelerated by a change of regulations, which allowed financial advisers to recommend the government scheme alongside commercial products.

Commercial reverse mort­gages have also been growing quickly, but nothing like the pace of the government scheme.

Moreover, if it suits the applicant (and assuming the applicant is fully aware that the real price of these loans is the reduction in the inheritance for the next generation), they are a welcome arrival in the market.

The news comes just as ­Andrew Boal the chair of the ­Actuaries Institute Retirement Strategy group has issued a paper on the wider issue of retirement income sources, suggesting it’s time to consider the role of the home as the “fourth pillar” in the retirement income system – alongside the pension, super and voluntary private savings.

Social Services Minister Amanda Rishworth has left the rate on the government’s reverse mortgage unchanged. Picture: NCA NewsWire / Martin Ollman

Boal now wants to push the notion of the family home as an active financial asset that can be used as an income stream. He also wants the government to review the areas and to “relax the age pension means test exemptions on money accessed through home equity release schemes such as reverse mort­gages”.

That would make tapping home equity even more attractive for older people.

As financial adviser James Gerrard has pointed out in The Australian: “There is scepticism over reverse mortgages – and they are not risk-free. Home prices may still fall in the future.”

What’s more, nobody likes a reduction in assets, but reverse mortgages at low prices are going to be very attractive to the asset-rich and cash-poor.

Gerrard says: “Under a reverse mortgage, you do not make regular loan repayments, meaning that interest accumulates on interest, and this compounding ­effect can lead to a large liability which is often paid by your children, after you die, via a large chunk of their inheritance taken out of your estate.”

Nonetheless, once more ­people understand the concept of reverse mortgages, the take-up of the Home Equity Scheme will accelerate further. The only question is at what point might Social Services Minister Amanda Rishworth begin to question whether the rates offered are too low.