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.