Reverse mortgages, which have been touted as a great way for seniors to live well in their retirement years, may in fact be putting their financial security at risk, according to ASIC.
In a new report, the corporate watchdog says banks are granting reverse mortgages to seniors without checking whether borrowers understood the future costs of their loan.
This in turn could impact their ability to afford their possible future needs such as aged care, it said.
For older Australians who own their home with few other assets, a reverse mortgage can allow them to draw on the wealth locked up in their homes, while they continue to live in them.
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ASIC reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures and complaints. It also commissioned interviews with 30 borrowers and consulted more than 30 industry and consumer stakeholders.
It found lenders have a clear role to play and need to do more: for nearly all of the loan files it reviewed, the borrower’s long-term needs or financial objectives were not adequately documented.
Importantly, under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they die or decide to move out.
But depending on when and how much they borrow, and property prices and interest rates, they may not have enough equity left for longer term needs.
“Reverse mortgage products can help many Australians achieve a better quality of life in retirement,” said ASIC deputy chairman Peter Kell. “But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs.”
National Seniors Australia senior officer Basil LaBrooy said products such as reverse mortgages are an important means for many people to provide themselves with an income stream or capital in later life.
“It is vital that a prospective borrower has a sound understanding of the product and the risks associated,” Mr LaBrooy said.
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