Mortgage brokers generally would be well aware of reverse mortgages and how they operate. Put simply, reverse mortgages offer asset-rich but cash-poor home owners a way to unlock some of the capital in their homes to use for any purpose they choose, whether it’s an overseas holiday, redecorating or a brand new car. The borrower pays nothing until the house is either sold or the last owner dies. While this may initially sound great for potential reverse mortgagees, there are risks.that must be considered. As a mortgage broker, it’s important that you effectively communicate these risks, as well as the potential advantages, to your clients. 

According to ASIC's Executive Director of Consumer Protection, Mr Greg Tanzer, “whilst equity release products can provide a useful means of releasing the equity in people's homes, they involve significant risks.

“In the right circumstances, an equity release product may provide income for Australians in their later years, or offer younger people a way of accessing home finance. The most significant risk is the inappropriate use of products.

”Consumers need to consider whether an equity release product is suitable for them, and seek independent legal and financial advice before choosing a product,?amp;nbsp;

Potential risks
The potential risks associated with accessing capital through a reverse mortgage or similar equity release product, include:
?the potential for a spouse to be forced from the home if the property isn’t jointly owned but is only in the name of the spouse who dies
?there may not be enough money available to move into a retirement home if the value of the property doesn’t increase significantly enough
?receiving a lump sum from a reverse mortgage may reduce or negate any Centrelink entitlements
?money may have to be repaid if interest rates rise and the value of the property falls
?the value of the estate may be much less than expected. 

A growing market
Of course, there is a market for reverse mortgages simply because they do provide some real advantages for some. In fact, there are now around 15 reverse mortgage products available in Australia. The sector has grown significantly in the 12
months to March 2005, going from $468 million to $770 million, with 8,899 new loans provided. A recent industry report estimates that the potential market for reverse mortgages could increase to $12 to $15 billion by 2010. 

Weighing up the gains
As a mortgage broker, you should communicate the potential risks as well as the potential advantages for your clients. Some of these potential advantages include:
?freeing capital tied up in the family home for those who are cash-poor or want extra money
?the ability to live in the family home until it is sold or the last owner dies, while enjoying access to some of its value
?no repayments required on the loan.

And remember, before deciding on a reverse mortgage, your clients should seek independent financial and/or legal advice to help them determine whether a reverse mortgage is right for them.

 

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