An Actuarial Beginning
Peter commenced his actuarial career when he joined National Mutual after completing a Mathematics degree at Monash University. He sat the actuarial exams through the UK and qualified as an actuary in 1975, by which time he was a consultant with ES Knight & Co. As the newest qualified actuary, Peter found himself working in what were then considered “non-traditional” fields such as acting as an expert witness, assessing economic loss in personal injury cases and structuring solutions for long term financing of infrastructure projects. In time he ventured out to set up his own consulting firm, and spent the next few decades working with banks, public and private corporations and various government departments.
In the late 1980s, Peter was encouraged by the Victorian Council for the Ageing to find an alternative solution to reverse mortgage equity release products for Australia’s ageing population. This marked the beginning of Peter’s interest in the home equity release field and thirty years on he is pleased to see the area starting to gain prominence, particularly with recent reports released by the Productivity Commission and the Actuaries Institute.
In some ways, Peter views his work in home equity release as having been the most “actuarial” in his career. He observes that “It naturally commenced with a risk analysis in relation to who should carry the future risks around interest rates, property values and longevity. Should it be the senior homeowner or should it be transferred to an investment pool?”
Developing Homesafe Wealth Release
In 2000, Peter decided to try his hand at building a debt-free home equity release offering. This resulted in the establishment of Homesafe Solutions, a joint venture with Bendigo and Adelaide Bank. Homesafe commenced operations in 2005, offering Homesafe Wealth Release, a home reversion product.
Did Peter’s actuarial background assist him in the development of Homesafe Wealth Release? “Yes it did. The product is based on actuarial concepts that I studied decades ago. A home can be broken down into two components, a life interest and a reversionary interest. Actuaries are trained to understand and to value these. Pricing the product involves applying a range of assumptions to project cashflows to place a value on the reversionary interest. When a senior homeowner transacts with Homesafe, they are selling a percentage of this reversionary interest”.
“There are many other aspects of setting up the Homesafe business where an actuarial background has been helpful too. The product involves a long term contract with future uncertainty around longevity, rates of voluntary contract completion and of course property markets. We have spent a lot of time considering potential scenarios - basically risk management around the brand, the asset that has been created via purchasing a sale interest in a portfolio of properties, legal contracts, etc. We also need to make assumptions about future experience, without much data to go on. Eleven years on we do at least now have some data specifically related to our product”.
Housing Wealth’s Role in Retirement Funding
Peter has long viewed the family home as the fourth pillar of Australia’s retirement income system, and is pleased to see the growing focus in recent times on the important role that housing wealth can play for homeowner retirees. He observes that public policy development still has a long way to go.
Most senior Australians do not view their home as a store of wealth, but as a place to live, and they have a strong emotional attachment to their home. The key to making people feel comfortable tapping into their housing wealth is to ensure that they have security of tenure, meaning that they can continue to live in the home for as long as they wish to. There can be a misperception that utilising housing wealth has to mean losing the home.
Peter observes that “For a retiree homeowner who has few assets besides the family home, accessing a small amount of home equity each year could make the difference between a dignified retirement and just getting by. Releasing home equity can allow people to replace a car or white goods, arrange for home modifications if mobility becomes a challenge or fund some in-home care to make it possible for them to continue living in their home”.
The Home Equity Release Market
There are a range of means by which housing wealth can be released. Selling the home is the obvious one, but a retiree still needs a place to live. Downsizing is an option that works for some people. Alternatively, proucts such as reverse mortgages and home reversion products facilitate the release of housing wealth while a retiree continues to live in the home.
Given all this, why don’t more people release home equity today? This is an area that Peter has contemplated for many years, and views as complex. “Of course there are demand factors and supply factors. Some people are of the view that if the demand was there, supply will follow. I disagree. In my view, the demand is there, but there is a market failure due to an unwillingness of investors to supply capital to fund equity release products on a large scale.”
“The lack of over-arching regulation covering home equity release is also problematic. There is a lot of regulation covering one specific product – the reverse mortgage. This is like shutting the stable door after the horse has bolted – good principles-based regulation for home equity release products would provide protections, such as homeowner security of tenure, for products that have not been developed yet, as well as for existing products. This would improve confidence in the sector.”
“And of course there are issues around financial literacy – people are not familiar with equity release products, and the time in their lives when they need them is perhaps not the time when they feel confident making big financial decisions. Tapping into home equity isn’t currently ‘the norm’ in Australia where the family home is something of a sacred cow.”
“With so much commentary about the need for senior Australians to be able to tap into housing wealth to supplement retirement funding, there is a lack of product development. The number of reverse mortgage providers contracted following the Global Financial Crisis – and most of the open reverse mortgage products are not promoted. The Homesafe product is only one variation of a home reversion product, with strict eligibility criteria limiting availability. One would think this is an area that would attract new providers. I am aware of a few potential entrants who looked at developing product, but ran up against a lack of capital. I’m not sure how this gets solved.”
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