The role of home equity release in maintaining home ownership

Home Equity as an Asset

Home equity is increasingly being recognised as an under-utilised fourth pillar of our retirement income system. Senior Australians who own their homes are often ‘asset rich, cash poor’. It is possible to monetise a portion of a homeowner’s housing wealth while the homeowner retains the right to live in the home.

There are products which facilitate the separation of the ‘place to live’ and ‘store of wealth’ attributes of the family home.  Debt home equity release products are known in Australia as ‘reverse mortgages’. Alternatively, there are mechanisms which facilitate a senior homeowner selling a share of the future sale proceeds of their home whilst continuing to live in it, sometimes known as “home reversions”. An important feature of reverse mortgage or home reversion products is lifetime security of tenure for the homeowner.

In mid-2019 the eligibility rules for the government’s Pension Loans Scheme, effectively a reverse mortgage offering an income stream but not a lump sum payment, were broadened. This has allowed more senior Australians to utilise this scheme to supplement retirement income. 

Downsizing is another way to release home equity and can work well financially for retirees in large/valuable homes, who are happy to move to a different area where housing is cheaper, or who can find suitable housing stock to downsize to in their local area. 

Why is Home Equity Released?

There are wide-ranging reasons why a senior homeowner might release some home equity, such as to:

• pay for medical expenses;
• fund in-home care and/or home modifications, both of which facilitate a longer period of ageing in place than might otherwise be possible;
• finance large unexpected costs;
• assist a family member; or
• extinguish debt.

Traditionally, home equity release has been viewed through a retirement funding lens for its potential to supplement retirement income.  This is a key focus of the use of home equity in the Retirement Income Review.

Increasing Debt Levels at Retirement

Increasing numbers of Australians are ceasing full-time work with outstanding debt, for a range of reasons which include:

• housing affordability;
• earlier than planned retirement due to job insecurity or ill health;
• buying a house at an older age than previous generations;
• having drawn down on ‘line of credit’ home loans to increase spending in the years preceding retirement; or
• incurring non-housing debt – credit card, gambling, outstanding rates etc.

Data from the ABS Retirement and Retirement Intentions Survey for 2018-2019[1], suggests that more than one third of retirees who withdrew a lump sum from their superannuation used the money to pay down housing debt or to spend on their home.

For homeowners with significant debt who have ceased employment but do not have sufficient superannuation to repay their debt, there may appear to be no choice but to sell the home and commence retirement as a renter. As housing affordability worsens, the risk of this increases. 

However, for homeowners who are willing and able to access a home equity release solution, selling their house can be avoided. 

For Homesafe’s home reversion customers[2], the most common reason for releasing home equity in recent years has been to extinguish debt. This appears to be an industry trend with a recent RMIT study of Heartland Seniors Finance reverse mortgage customers[3] identifying that “in more recent years debt retirement has superseded home improvement as the most common loan purpose”.

The Benefits of Home Ownership

The benefits of home ownership over renting are more than just financial. Perhaps most crucially, home ownership provides security of tenure.  With this comes a sense of stability, connections to a community and social networks. By entering into a home equity release arrangement, lifetime security of tenure can be maintained. Nothing really changes until the home is sold, either by the homeowner or their estate. The main impact is often for beneficiaries who inherit less. There can also be implications for aged care funding.

Financially, the obvious benefit of home ownership in retirement is that there is no need to spend a significant portion of retirement income on rent. This can particularly be the case for single retirees with the age pension as their only source of income, even after allowing for rental income supplements. 

Going forward, a vibrant home equity release market could help to maintain home ownership for a subset of senior Australians.

Retirement Debt Exacerbated by the Pandemic

Following the economic disruption of COVID-19, Australian lending institutions announced COVID-19 support packages to provide affected borrowers, including home loan customers, with an option to defer repayments.   

As the end of the loan repayment deferral periods approach, lenders are implementing new phases of support to assist customers to resume. There will inevitably be a subset who will experience ongoing financial difficulty. Options such as extending the length of loans, temporarily moving to interest only payments etc. will help some, however others are likely to need more extreme solutions. 

Older home loan customers will be disproportionately affected as they have fewer future working years in which to recover from the economic impact of 2020. Some may find it difficult to work again before retirement. 

A home equity release arrangement is one potential solution for homeowners no longer in a position to reduce/extinguish housing debt due to changed circumstances. Such an arrangement would allow them to remain in their homes rather than having to sell them. In addition to the prospect of selling the home being undesirable for individual homeowners, it would also be adverse for the economy and the property market if homes of distressed borrowers were sold en masse.

Although current home equity release offerings are designed for senior Australians, some of the concepts might work for offerings targeted at younger homeowners, perhaps along the lines of the “debt for equity swap” suggested by Professor Kevin Davis in a recent AFR article[4].

Is there a demand/supply mismatch?

Of the five groups of reverse mortgage lending brands assessed in the 2018 ASIC review of reverse mortgage lending[5], which included major banks, only one is writing new loans today.  That “options for borrowers were limited due to a lack of competition” was a finding by ASIC in 2018[6]: the lack of competition has worsened since then.  The reasons for a lack of supply of home equity release products warrant investigation.   Senior Australians own an estimated $1trillion in housing wealth, suggesting that lack of demand was not behind these closures.

The RMIT report notes that the companies offering reverse mortgages in Australia today are Heartland Seniors Finance, Household Capital, R&N Bank, IMB Bank and G&C Mutual Bank. Since 2005, Homesafe Wealth Release has been available to senior Australians as a “home reversion” style of home equity release mechanism. The eligibility criteria of these offerings mean that home equity release is not readily available to all senior Australians.

Notably, none of the home equity release offerings available today are from major banks or “household name” financial institutions.  Westpac, Macquarie Bank and the Commonwealth Bank closed their offerings in 2017/18. SEQUAL, an association established in 2004 for providers of home equity release products, closed its operations in 2017 as membership dwindled. 

Extension of the government’s Pension Loans Scheme to provide a lump sum version would be one way of quickly increasing capacity, as the scheme currently only provides an income stream and so cannot be utilised to provide a lump sum to extinguish debt.

A key issue impacting supply is capital. The flip side of security of tenure for a senior homeowner is that the capital provider will not have their capital returned until the homeowner, or their estate, sells the home. This is a long-term investment with limited liquidity. This might be an area where government can play a role, such as along the lines of the Australian Business Securitisation Fund[7] but for providers of home equity release solutions. 

Regulatory settings could also be examined, to test if there are compliance requirements or regulatory barriers which are unnecessarily inhibiting supply, innovation and/or efficiency.

_{[1] 6238.0 Retirement and Retirement Intentions, Australia, 2018-19, Released 8 May 2020, Table 8.1 Superannuation and lump sum details of retirees}

_{[2] Homesafe Wealth Release is a debt free home equity release offering from Homesafe Solutions and has been available to eligible senior homeowners since 2005.  It involves the homeowner selling a share of the future sales proceeds of the home.}

_{[3] “Reverse Mortgage: Financing Ageing in Place” by Stuart Thomas, Sarah Sinclair, Ashton de Silva and Aviel Leong}

_{[4] Opinion piece by Professor Kevin Davis published in the Australian Financial Review 23 August 2020 entitled “How to hold back a flood of mortgage defaults when loan holiday is over”}

_{[5] https://download.asic.gov.au/media/4851420/rep-586-published-28-august-2018.pdf}

_{[6] Finding 4, outlined on page 14 of the report}

_{[7] https://treasury.gov.au/small-business/absf}

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