The surprise return of the government bank

It’s hard to believe but the government is getting back into banking, it’s right there in the budget papers.

A security guard closes a strong room door in the vault of South Australia’s State Bank in 1990.

The government is getting back into banking. Yes … it’s hard to believe, after all the Greens got shot down pretty hard with a government-backed mortgage idea only a short time ago, but it’s there in the budget papers. The Turnbull regime is to upgrade the so-called Pension Loans Scheme, a government run reverse mortgage program.

What’s more the government is dropping all restrictions on the plan and allowing anyone of pension age in Australia to access the scheme which offers lower interest rates than the banks.

Well, who’d have guessed? The collapse of the State Bank of Victoria and the State Bank of South Australia must have now been dispatched to the dustbin of history. What’s more, the privatisation of what was once the government owned Commonwealth Savings Bank — now CBA — must have been put to one side too with the odd sight of a Liberal party Treasurer stumping up $11 million to get the newly invigorated Pension Loan Scheme fully functional.

If bank executives were not so busy fighting for their reputations at the banking royal commission they might have had more to say about this flash of 20th century government paternalism.

Sure, it’s only a toe in the choppy waters of high finance, but where will it end?

In fact the government’s mortgage deals are keen. They are offered at 5.2 per cent, very comfortably below comparable products from CBA and a number of smaller rivals which offer their products at 6.2 per cent or higher.

Just now, reverse mortgages remain a minor business — there are about 40,000 held in the local market with the average client being 71 years of age and an average sized mortgage at $800,000. Nonetheless, reverse mortgage products can be accessed for a minimum size of about $60,000.

Moreover, the sector may surge in the near future for two reasons. Firstly, the Australian market is now ripe for a fully fledged reverse mortgage industry as an ageing population inhabits exceptionally valuable real estate. The same ageing population is facing tighter pension rules, with 90,000 people falling off the pension since January 1 this year when the rules for full- and part-time pensions were tightened under reforms to the so-called taper rate.

As for the government’s recent history as a seller of reverse mortgages it has been marketed so poorly and its original terms were too restrictive to give the product a proper chance.

Reverse mortgages work like this. The homeowner takes out a mortgage over the home, under the terms of the loan the mortgage provider pays a set sum to the homeowner. The mortgage is cleared when the homeowner can pay it off., which is invariably when the house is sold.

The upside is reverse mortgage products can offer extra income to pensioners while they get to stay in the family home. The downside is they may also trigger intergenerational stress as the interest owing on the loans gets ‘capitalised’ or rolled up into the loan as time passes and that’s rarely good news for anyone waiting for an inheritance.

But if the Pension Loans Scheme takes off, such complications might be the least of the government’s problems.