No longer is it enough to dip into their own pocket to cobble together a deposit or go guarantor on a home loan; retirees are increasingly locking themselves into fresh debt to give their kids a leg-up. And where else would they turn to but the prized family home?

It is here, in releasing valuable equity from the family home, where cash-poor boomers are finding a way to pass on their inheritance earlier.

“The bank of mum and dad is huge; it’s the sleeping giant of Australian finance,” says Josh Funder, chief executive of reverse mortgage provider Household Capital.

Reverse mortgages allow homeowners to borrow money against the equity in their home. Rather than making regular repayments like a typical mortgage, the balance of the loan, along with the accrued interest and fees, is repaid when the homeowner sells the property, moves out, or dies.

Rates are typically 2 to 3 per cent higher than mainstream mortgages, and the amount homeowners can borrow varies based on age. At age 65, the most a retiree can access is 25 per cent of their equity. Older borrowers can access a higher percentage due to their age.

Reverse mortgages have been around for a long time, but they remain a niche product.

The major lenders have shunned the space, with the Commonwealth Bank the last of the big banks to axe a reverse mortgage offering at the end of 2018, in the wake of the banking royal commission and amid closer regulatory scrutiny.

A review by the corporate regulator at the time found borrowers had a poor understanding of the risks and future costs of their loans, and generally failed to consider how their loans could impact their ability to afford possible future needs.

Still, it’s a fast-growing segment of the market, with operators such as Household Capital and peer Heartland Group reporting rising demand in recent years. That’s even as they compete with the federal government’s Home Equity Access Scheme, which offers much better rates and now has 16,000 participants, up from 770 six years ago, according to the Department of Social Services.

“Until we came along, most of the bank of mum and dad was at the expense of superannuation or parents’ available funds. But now we can have a really structured approach (through reverse mortgages) to bring forward the bequest to when people actually need it from the bank of mum and dad, without them sacrificing their own retirement,” Funder says.

The major banks may not want to lend to homeowners due to the potential reputational risk but are instead getting exposure by lending to the likes of Household Capital, which just raised $270m from local and global investors to fund its lending.

Global banks and insurance companies, as well as Australian banks and a major superannuation fund invested in Household Capital’s recent raising.

“That gives us real confidence that we’ll be able to routinely securitise low-risk Australian reverse mortgages and at the same time generate billions of dollars a year to help Australia meet the funding and housing needs of an ageing population,” Funder says.

Pensioners looking to go down this route typically have two options: a reverse mortgage with lenders such as Household Capital or Heartland Bank, or the government’s Home Equity Access Scheme, which is more restrictive but offers rates at an attractive 3.95 per cent.

 

What you need to know

There are a number of conditions for accessing home equity schemes, including that the house should be mortgage-free or, if there is a mortgage outstanding, that it is refinanced as part of the new reverse mortgage.

More and more homeowners are in the latter segment – at the age of retiring without having paid off the original mortgage. Funder puts the figure at about 30 per cent and says it’s growing every year.

As the debt grows over time, reverse mortgages can severely deplete wealth and inheritances, though negative equity protections have been in place since 2012.

A 65-year-old accessing 25 per cent of their home equity through a reverse mortgage should still own more than 50 per cent of their home by the age of 90, Funder says.

“Negative equity on Australian variable rate reverse mortgages is very low, almost zero,” he says.

“It’s also addressing intergenerational transfer and intergenerational equity. You don’t have to wait until you die to help your kid and you also don’t have to trash your own super to pay off the mortgage, or help your kids.”

That’s assuming the adult children are comfortable with their parents taking on more debt in old age just to help out.

 

This article first appeard in The Australian as: Bank of mum and dad: Reverse mortgages are a new way to inherit early