By Geoffrey Newman
September 24, 2007 12:00am
The popularity of reverse mortgages continues to grow exponentially, with a new analysis showing almost one quarter of people who have taken out reverse mortgages against their homes drew down additional funds in the first half of the year.
The study by advisory firm Trowbridge Deloitte found the volume and number of reverse mortgage loans continues to rise strongly, although from a relatively low base.
The size of outstanding loan balances grew by 67 per cent in the 12 months to June to $1.81 billion. In the six months to June the number of loans grew by 13 per cent to 31,544.
Reverse mortgages allow home owners to tap the equity in their homes without having to sell and without the demands of regular repayments. In return for a lump sum or regular payment from the lender, the owner agrees to hand over a portion of the value of the home, which includes interest payments, when they die or when the property is sold.
The average loan size is about $52,000 and the average age of borrowers 73.
"This growth reflects the increasing role that reverse mortgages are playing for senior Australians," said industry representative Kieran Dell.
For the first time, the study, the third in the series, looked at additional draw-downs by borrowers and found 23 per cent had borrowed additional funds in the six months to June, adding an average of $10,500 to the loan facility.
The industry has been working on improving its image, amid concerns that cash-strapped retirees were insufficiently aware of the financial burden they were taking on with a reverse mortgage, which attracts a higher interest rate than a standard home loan.
A recent report from consumer advocate Choice claimed lenders were encouraging borrowers to take the maximum loan amount possible.
Following the Choice report, the industry body, the Senior Australians Equity Release Association of Lenders, which represents more than 95 per cent of reverse mortgage lenders, worked with government and consumer groups to lift standards.
In particular, it strengthened the "no negative equity" guarantee to ensure borrowers would never owe more than the value of their home. The study authors said the latest results would allay fears about reverse mortgages.
Trowbridge Deloitte partner James Hickey said, on average, borrowers were only drawing on 75 per cent of the maximum possible loan amount and 10 per cent of borrowers each year were choosing to pay back their loans in full.
"This is a very important figure for the industry," Mr Hickey said. "It indicates that these products do not have to be 'set and forget', where they are left to accumulate interest for the life of the borrower." But reliable data on what borrowers were doing with the money had been more difficult to obtain, Mr Hickey said.
Only 15 to 20 per cent of borrowers choose to have the money paid in instalments and very few reinvest the money, suggesting that most are using the funds for "lifestyle" reasons, such as travel, buying a new car and home renovation.
For the first time the study also showed brokers becoming the dominant sellers of reverse mortgages.