Financial advisers have a universal reaction to reverse mortgages, financial services consultant Paul Resnik says. "Basically they all start off with the sphincter muscle response. Which is this [crosses his arms and purses his lips]. Why? Because they know the power of compound interest, they're afraid of litigation and in a way it's a sense of failure. It's a failure for them to think that their clients might need [a reverse mortgage]. They need to relax the sphincter muscle," Resnik says.
Up to 20,000 Australian home owners had a combined $1.1 billion in reverse mortgages at June 2006, according to Trowbridge Deloitte research commissioned by the Senior Australians Equity Release Association of Lenders (SEQUAL). The market has doubled in the past 18 months and it is forecast to explode to $15 billion in the next couple of years, fuelled by retiring baby boomers and the chronic superannuation gap. What does this mean for planners? Resnik believes the burgeoning market represents a huge opportunity.
"I think including the house as a liquid asset [in a financial plan] is the most sophisticated, demanding, professionally difficult activity that we've ever known. This is the natural place for financial planners to differentiate themselves," he says. "I have an argument that may be naïve, which goes: 'You're either product salesmen or you're not.' Who's got the right to deprive people of choice? I think this goes right to the heart of being a professional when you're able to suspend some of your own prejudices and give people choice."
Reverse mortgages have a chequered past. British retirees snapped them up in the 1980s. When house prices slumped, debt exceeded the value of their property and many lost their homes. Eighteen months ago SEQUAL executive director Kieren Dell did the rounds of the major dealer groups and met with degrees of resistance.
"Most said 'I can't believe our clients would ever need a reverse mortgage', or 'what are they?' Some of the groups got it together early and in the last 12 months it's been a case of [other dealer groups] playing catch up," Dell says.
"The problem for [dealer groups] is twofold. They can't just buy research like they do on investment products from van Eyk or Morningstar, they've had to go and do their own. Also, because they're credit products they're not governed by the Financial Services Reform Act (FSRA). They couldn't just slot them in during the normal process." Trowbridge Deloitte surveyed 24 of the 30 main dealer groups in November. It found the majority had a reverse mortgage on their approved product list (APL). Importantly, half of the dealer groups believed equity release would be an important financial planning tool within the next one to two years, while a quarter believed it would be in the next 24 to 36 months, and the other portion believed the market would take off in three years or more. Product quality and training were found to be the greatest areas of concern for dealerships. Unprompted, most said the reverse mortgage should be a product governed by FSRA. The major reverse mortgage providers to the dealer groups according to business share are Bluestone Equity Release, Macquarie Bank and OFM, the research found.
Three years ago, banks, including Commonwealth Bank of Australia and St George Bank, were the traditional providers of reverse mortgages, supplying between 80 per cent and 90 per cent of the market through direct sales, according to Dell. "Research last year showed about 43 per cent [of reverse mortgages written] was through intermediaries. Today a more diverse group of providers has led to more diverse distribution. We're about to redo the research and I wouldn't be surprised to see it tip over 50 per cent," he says.
Equity release is a specialist competency, Tandem Financial Advice managing director Andrew Doquile says. The independent dealership added a reverse mortgage to its APL in September 2006 and developed specific technical, research and training to support its planners. "Advisers without the resources will struggle with this complex advice. The product has some serious implications for those clients whose advisers or brokers embark on this advice without the correct support or for those only interested in the dollars generated in commission," Doquile says.
"At Tandem we control the advice process so that we are sure from this perspective, we have as much certainty as we do across our financial planning business. Any relatively unregulated sales regime where large sums of money are paid on a commission basis is open to misuse by unscrupulous or greedy individuals. I imagine that brokers will have to live with the taint of product sales simply to max commission until this part of the industry is regulated effectively." Conversely, Capstone Financial Planning managing director Grant O'Riley has adopted a watchful approach.
"At this point in time the licensee has not aligned with any reverse mortgage providers. There are people who are sceptical. It's only going to take one or two misuses of the product and it'll all blow up. Capstone is sitting back and waiting to see what happens in the market," O'Riley says. Mariner Financial head of equity access Jim Brooks is poised to take advantage of the burgeoning market. Mariner Equity Access is on 30 APLs used by about 8500 brokers and planners. Mariner is in talks with groups that could provide access to another 1500 to 2000 professionals.
"I also think there's a view perhaps from the dealer groups as well that if they don't offer this facility through their planner networks then someone else will. I think it's increasingly becoming a legitimate retirement tool from a dealer group perspective," Brooks says. "We've seen the number and the demographics in the superannuation entitlements that people have in retirement, typically it's around $80,000, so we know that it's not going to last them forever. I think over time this will be a very mainstream product once we solve some issues around the risks involved."
When Brooks approached dealer groups 12 months ago with the equity release product, he found many were reluctant, uncertain about the risks and considered it dangerous. He blames negative press, particularly from the United Kingdom, for the equity release myths and misconceptions. The Australian market has learnt a lesson from the UK experience and produced products with safeguards to reflect that, he says. The "no negative equity guarantee" in the SEQUAL code of conduct, for example.
A reverse mortgage shadow shop by independent consumer watchdog Choice has generated more bad press. Cash-strapped retirees may risk losing their homes because of wide default clauses in contracts and a poor standard of information, it warned.
Choice visited 15 mortgage brokers and lenders then analysed 23 reverse mortgage loans. The majority of salespeople encouraged shadow-shoppers to take out the maximum possible loan and failed to give them the information they needed to make a proper decision, the survey concluded. "Choice has raised interesting comparisons in their research into the products available and it becomes more and more clear that contract definitions and interpretations are very difficult to compare. It appears that how you say a thing is as important as what you say. It is possible that we will eventually end up with a market for those who research and rank definitions in a similar fashion to that used in risk research," Doquile says.
Choice plans to lobby all state governments to adopt the New South Wales mortgage broker legislation. This legislation ensures all mortgage lenders have a licence and a dispute resolution scheme and requires all advice on reverse mortgages to meet a minimum standard. The Choice findings sparked a call by the Mortgage and Finance Association of Australia (MFAA) to create market standards. The MFAA has produced a Code of Proper Process for equity release products and helped to deliver an education program endorsed by SEQUAL. Bluestone Equity Release is a major product innovator and strives to set market standards. When it launched in April 2004, it was the only specialist equity release product in the market, according to chief executive officer Peter McGuinness. The company draws on the UK heavily.
"The UK market was dominated by products that offer fixed-for-life protection. And it's an unusual concept in the Australian market because it's not a fixed rate market, and for life, wow, that's a long time. We launched [a fixed-for-life product] and within a year we started to see a number of institutions offer that product as well," McGuinness says.
"And the percentage of business that's now being written on a fixed rate basis is actually starting to grow quite rapidly. Financial planners, interestingly, see that as important because they obviously try to forecast when giving a client advice and anything that can deliver a high degree of protection and certainty in the financial plan has got to be seen as positive." New products use equity in the home to fund aged care accommodation bonds and innovations centre on the delivery of money to the client.
"Historically, reverse mortgages have been used as quite blunt instruments - a lump sum of money was delivered. In order to stimulate the financial planning world we have had to innovate the product so financial planners have had more flexibility in how they draw down the equity, because what the financial planner doesn't necessarily want is a $300,000 lump sum. What they actually need is money to be drawn down over time. We rolled out an instalment product 18 months ago." Bluestone is the only lender in Australia and New Zealand to offer a variable rate product that is capped for life. The new superannuation rules will spark hybrids of standard mortgages and reverse mortgages, McGuinness believes.
"There's an opportunity for a product where clients can at perhaps a slightly younger age withdraw equity while they're still working, but use the money to contribute to superannuation and then role into an equity release product when they hit retirement. We'll start to see products that facilitate more exciting superannuation strategies," he says. With increased regulation, education and consumer demand, reverse mortgages will become an integral part of Australia's financial landscape. Advisers should think about whether they plan to relax the "sphincter muscle response" sooner rather than later.
