Reverse mortgage shadow shop

Our shadow shop revealed poor advice and information from reverse mortgage sellers.
 
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01 .Introduction

Retirees

Reverse mortgages are secured against your home. The title stays in your name and you’re responsible for all ongoing costs such as rates and maintenance.

The impact of fees and interest means the loan grows over time. What’s left after it’s repaid depends on factors such as how much your house increases in value, the interest rate and the amount you borrowed.

Originally reverse mortgages were sold directly by the lender, but in the last few years mortgage brokers have started to offer these products. Currently only very few loans are sold by licensed financial advisers.

Please note: this information was current as of February 2007 but is still a useful guide to today's market. For more recent information, see our Reverse mortgages 2010.


CHOICE investigation

We sent three shadow shoppers, aged 65, to a total of 10 mortgage brokers and five companies offering reverse mortgages to find out what sort of information and advice is offered.

  • Each shadow shopper is married and the sole owner of their home.
  • All are retired: one receives a Centrelink pension, the other two a pension for Commonwealth employees.
  • They live in Sydney with houses valued between $600,000 and $1.5 million.
  • They asked for a $60,000 loan to buy a new car and go on a holiday.

23 loan contracts assessed

We assessed 23 loan contracts of reverse mortgages against six standards for consumer protection.

  • None of the loans met all the standards.
  • Ten met the five that we consider to be minimum contract standards.
  • Two are rated poor.

Read our reverse mortgage comparison.

What we found

Our shadow shop revealed a poor standard of product information and advice — it’s inadequate and needs regulation in order to improve.

  • The majority of brokers and salespeople encouraged borrowers to take the maximum possible loan instead of the requested amount. The more you borrow, the faster the debt grows and the less you or your estate will receive when the house is finally sold.
  • Most brokers and salespeople didn't give consumers all the information they need to make an informed decision. See Higher standards needed.
  • And we heard of some mortgage brokers offering very risky ‘asset loans’ to people enquiring about a reverse mortgage, which can put them in danger of losing their home.
  • See Risky asset loans.

CHOICE verdict

Reverse mortgages can only work to your advantage if you fully understand them, are aware of contract traps and consider your specific circumstances and future needs. However, our shadow shop showed there’s a danger of coming across mortgage brokers and salespeople who don’t give you all the information you need to make an informed decision.

CHOICE wants to see improvements to the standards for product information and contract conditions urgently, to protect elderly consumers from getting into financial danger at a time when they could be frail and vulnerable.

Recommendations

CHOICE is deeply concerned about our findings. We will be lobbying all state governments to adopt the new NSW mortgage broker legislation which:

  • Ensures all mortgage lenders have a licence and a dispute resolution scheme.
  • Requires that all advice on reverse mortgages meets a minimum standard.
Help us help you

Occasionally we receive calls from journalists looking for case studies. If you’re interested please send an email with your experiences to reversemedia@choice.com.au and include a daytime phone number. We'll always contact you first asking for your agreement before giving your contact details to journalists.

 
 

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02.What to look out for

 

How reverse mortgages work

Reverse mortgages are aimed at home owners aged 60 and over.

You can use them, for example, to supplement your income with a monthly payment, buy a new car or to pay for a holiday. Essentially you borrow money against the value of your property, but make no regular repayments. The loan is repaid when you move, sell or after your death — and in the meantime, of course, it accumulates compounding interest.

Reverse mortgages are secured against your home. The title stays in your name and you’re responsible for all ongoing costs such as rates and maintenance.

The impact of fees and interest means the loan grows over time. What’s left after it’s repaid depends on factors such as how much your house increases in value, the interest rate and the amount you borrowed.

Features and traps to look out for:

  • Wide default clauses: with some contracts you can get into default for relatively minor issues like overlooking some paperwork or not punctually paying your rates. Once you’re in default, the lender has the right to ask you for immediate repayment of the loan and can start enforcement action to sell your home.
  • The most important protection normally offered is the ‘no negative equity guarantee’. What this means is that you can never owe more than the sale proceeds of the property, even if its sale price doesn’t in reality cover the debt. It’s a vital element of protection for people taking out a reverse mortgage. Make sure your loan offers an unconditional guarantee otherwise the lender may not honour it if you’re in default at the time of the sale.
  • How much you can borrow depends on your age and the value of the property. At age 60 you can usually get up to 15% of the value, at 80 up to about 35%.
  • You can receive a lump sum, regular amounts (such as monthly), a combination of both or use a flexible drawdown (different amounts can be drawn down over time as you need them). Not all lenders offer all options.
    Trap Fees can apply to drawdowns, and lenders may stop regular payments if the value of your property diminishes.
  • Interest rates: variable and fixed rates are available. Fixed-rate loans may be available for terms of between one year and your lifetime.
    Trap You may have to pay expensive ‘break’ fees if you repay the loan before the end of a fixed-rate period.
  • A range of fees can apply, including setup and annual fees. You also have to pay for regular property valuations (normally every three to five years).

Read our assessment of the contracts and profiles for 23 reverse mortgages.

03.Higher standards needed

 

Reverse mortgages are very complex and relatively new products with which consumers have little experience. We think these products should only be sold to well-informed people who are aware of the pitfalls and have considered them carefully.

This is where the professional who sells the product to the borrower has an important role. Most lenders will try to ensure you’re aware of important conditions before settlement: most require you to have expert independent legal advice, some also require financial advice and some may contact you directly to make sure you understand the loan contract.

However, comprehensive information is needed right from the first meeting. You should be able to expect to be fully informed before you formally apply for a loan.

Gaps in information

While our shadow shop was small (three people visited or called a total of 15 mortgage brokers and lenders), it still showed glaring gaps in the information provided to consumers. The majority of mortgage brokers and salespeople:

  • Didn't talk to the consumer about alternatives such as buying a smaller home.
  • Recommended borrowing a larger sum than needed. Brokers usually receive an upfront and/or ongoing commission on the amount you borrow. This leads to a potential conflict of interest, as it’s in the broker’s interest for you to borrow more.
  • While most gave the shadow shoppers a graph or tools to calculate how much the loan would grow, some only gave one scenario or didn't explain assumptions.
  • Didn't talk about future needs such as long-term aged care.
  • While a majority mentioned the no negative equity guarantee, none explained that there are situations in which it wouldn't apply, and a large majority didn't explain that there are situations when the loan could be in default, thus potentially voiding the guarantee.
  • Didn't mention requirements like maintenance, rates and building insurance.
  • Dealt well with the fact that our shadow shoppers were each the sole owner of the house, with some recommending their wife should be included on the title deeds before taking out the reverse mortgage. However, some didn't raise the issue. One broker even showed a serious gap in product knowledge by recommending a reverse mortgage that isn’t available in this situation — the lender requires all residents to be owners.

On the positive side:

  • Many recommended borrowers talk to their children and contact Centrelink.
  • Loan features like the interest rate and payment options were usually explained well.
  • The brokers and salespeople also provided our shadow shoppers with material ranging from product factsheets to comprehensive brochures with general and specific product information.

Bizarre sales practices

When CHOICE shadow shopper Anthony called the COMMONWEALTH BANK (CBA) for information about reverse mortgages he encountered somewhat bizarre sales practices.

A pre-approval interview was conducted over the phone. During this phone call the salesperson said they needed to open an account for Anthony to get to the next screen on their computer. They explained very few details about the product but offered to answer specific questions and to send information.

Although the information never arrived, Anthony did receive a transaction account statement and a call from a valuer. He told the valuer he wasn’t interested and asked for the account to be closed. But a few weeks later he received another statement, this time for a line of credit account.

The CBA confirmed its staff did make mistakes in handling our shadow shopper’s enquiry and said it’s taking steps to reinforce correct procedures.

04.Brokers recommend risky asset loans

 

A few years back, Jane and Peter from Sydney had difficulty keeping up the repayments on their $190,000 home loan and went to a mortgage broker, asking for a reverse mortgage. The broker recommended they take out a larger loan to pay off their original one. He told them they wouldn’t have to make monthly interest payments on the new loan.

Jane and Peter thought they’d been offered a reverse mortgage. In fact it was a loan secured by their house that didn’t require documentation proving their ability to repay it — this is sometimes called asset lending.

The difference from a reverse mortgage is that you’re required to repay the asset loan (including accumulated interest) at some stage, and not just when you sell your home, die or move out. These loans are usually structured in a way that provides you with enough funds to repay existing debts.

However, with repayments built in and added to the loan amount, the loan will eventually grow and you may not have the money to pay it out when it’s finally required. Brokers may suggest people who take out one of these loans can again refinance at this point, but that strategy can only work if the value of the home has increased sufficiently — it’s very high-risk.

After taking out the recommended loan and using money for renovations and repayments, Jane and Peter now owe $350,000 and are in danger of losing their house.

Two mortgage brokers offered such a loan to CHOICE shadow shopper Larry as an alternative to a reverse mortgage. Larry is on a Centrelink pension. One broker suggested he could borrow up to 70% ($420,000) of the value of his home and use the money for investing.

Investigation needed

CHOICE is very concerned about this practice. Asset loans are in no way similar to a reverse mortgage as they require repayment and don’t have a no negative equity guarantee. They put borrowers in danger of eventually losing their home.

Recommending such a product to borrowers who are in financial difficulty and can’t afford repayments can only be called unscrupulous. We’ve asked the Australian Securities and Investments Commission (ASIC) to investigate.

Thank you

For valuable input in this story we'd like to thank:

  • David Tennant, Care Inc. Financial Counselling Service
  • Katherine Lane, Consumer Credit Legal Centre (NSW)
  • NICRI

05.Reverse mortgage calculator

 

The calculator shows you how long it could take until the loan is worth more than your house.

The ‘no negative equity guarantee’ normally offered by the lender protects you against this. What this means is that the lender covers the difference if the sale price of the house doesn’t cover the debt.

Make sure your loan offers an unconditional guarantee otherwise the lender may not honour it if you’re in default at the time of the sale.

CALCULATOR MISSING

Note: House value compounded annually, loan interest compounded monthly.

Disclaimer: Every effort has been taken to ensure the accuracy of this information. You should check product details and conditions with any institution concerned before committing yourself. Our recommendations are of a general nature and have not been developed with your individual circumstances and needs in mind. Consult a licensed financial services professional if you require advice about your specific financial needs.