KEY POINTS:
A strict new code of practice governing the reverse mortgage industry looks set to become law.
In her 2007 Review of Retirement Income Policy out this week, Retirement Commissioner Diana Crossan recommended that by next year a code being developed by the Office for Senior Citizens should become
legislation.
The review says the market conduct and security of the largely unregulated home equity release industry "must be an urgent priority".
Reverse mortgages, the most prevalent form of home equity release, enable a person over 60 to borrow against some of the equity in their home. The loan and its accumulated interest is repaid when the person dies or the home is otherwise sold.
The code is likely to stipulate that:
* Home equity release products contain a "no negative equity" guarantee, so that if all the equity is used up in a home the mortgage holder or their heirs will not be left with a debt.
* The mortgage holder be guaranteed lifetime occupancy of the home.
* A potential client be given projections on how much the loan will grow to over time.
* Legal and financial advice be mandatory before a client takes on an equity release product.
* Equity release loans be legally transferable to a retirement village or other property.
Age Concern chief executive Ann Martin said a lot of older people did not fully understand what they were getting into when they took out a reverse mortgage.
Figures from Sentinel, one of the main providers of reverse mortgages, show that a $40,000 loan taken out at 10.5 per cent interest (although its current interest rate is 11.55 per cent) will grow to $173,000 in 14 years - an increase of 332 per cent.
"They don't really appreciate that sort of compounding [interest]," Martin said.
Vaughan Underwood, CEO of Sentinel and chairman of the industry body Sherpa (Safe Home Equity Release Products Association), said the industry was supportive of a code becoming law.
"It's a relatively new sector and, as such, unregulated at the moment. We think it will give credibility to it."
He said Sherpa's own code exceeded the requirements of what was being proposed.
Underwood said the industry hoped a code would capture all equity release products, such as one which reinvested capital released from a home in third tier financial institutions - the theory being that a higher rate of interest would be earned and the loan would pay for itself.
They were risky products, he said.
Martin said one of Age Concern's biggest worries was who would be providing financial advice to seniors considering an equity release product.
PRICE TO PAY
How much will your reverse mortgage cost you?
WHO
73-year-old woman (average age of Sentinel reverse mortgage clients)
HOW LONG
Lives for another 14 years (to average life expectancy for a woman)
LOAN TAKEN OUT
$40,000
INTEREST RATE
Size of loan when house sold $173,000
(figures provided by Sentinel)
***
Borrowers 'unaware' of true cost of loan
Mrs MC and her late husband had researched home equity release schemes. But to her they were "just sums of money", and other options for raising cash did not appeal to her.
She was in a hurry and "unable emotionally to make decisions about the various plans, and the saleswoman seemed honest".
This is the kind of story, as told to the New Zealand Institute for Research on Ageing as part of its study on equity release schemes, that worries those working in the aged care and budgeting sectors.
A survey of 29 reverse mortgage holders by the Australian Securities and Investment Commission, released last month, showed that few had thought about their longer term financial needs before taking the mortgage. Fourteen borrowers didn't know how much their loan would cost over time, and six didn't understand how compound interest worked.
Raewyn Fox, chief executive of the Federation of Family Budgeting Services is critical of complicated fine print after seeing documentation from one reverse mortgage provider.
But Judith Davey, author of the report, said many of those interviewed were conscious of high interest rates.
