Compliance insights - Thinking about adding Reverse Mortgages to your offer?
The latest research conducted by CBA predicts that by 2030, 20% of Australians will be over the age of 65. That’s an increase from 3.6 million to 5.7 million in just 15 years! Our Senior Citizens are clearly a growing segment of the finance market and this is a very good reason to consider adding home equity release loans (such as Reverse Mortgages) to your product offer as a mortgage and finance broker.
What and why?
Typically older borrowers are ‘asset rich but cash poor’. They have limited incomes and some may not be able to borrow money through a conventional home loan because they do not have sufficient income to service the loan. This is often the case for people in the retirement phase of life.
Some retirees would like to utilise the equity in their homes to help fund their lifestyles. For some of these people, a Reverse Mortgage may be considered a viable option when considering retirement funding alternatives. With a Reverse Mortgage, the borrower can take the funds from the equity in their home either as lump sum, a regular income stream, cash reserve or a combination of all three and the mortgage, interest and all fees do not need to be repaid until their home is sold.
Reverse Mortgage products are becoming more flexible and increasingly sophisticated as the market develops, however the features of a Reverse Mortgage product will be dependent on the lender you choose. Reverse Mortgages are generally more complex products than regular home loans, which means your compliance obligations will be also. If you are interested in offering them to your customers, you will need to begin by re-educating and reskilling yourself in home equity release lending.
Accreditations and qualifications
In order to offer Reverse Mortgage products to your customers, you will need to complete a course through Senior Australians Equity Release (SEQUAL), the industry association for providers of equity release products. This course will allow you to learn about your compliance obligations so that you can obtain accreditations with the lenders who specialise in Reverse Mortgage products.
Connective Credit Representatives are not permitted to offer Reverse Mortgage products unless they have completed accredited training and assessment under the SEQUAL Equity Release Education Program. This MFAA approved training sets out a step by step best practice procedure for advising Reverse Mortgage customers and handling the Reverse Mortgage loan process.
Reverse Mortgages and your Responsible Lending obligations
As part of your Responsible Lending obligations, when arranging a Reverse Mortgage you must make reasonable enquiries about the borrower’s requirements and objectives in light of meeting their possible future needs as a retiree. These requirements may include a possible need for aged care accommodation and whether the borrower prefers/intends to leave any of the equity in their property to the beneficiaries of their estate when they pass away.
There are also extra rules about what makes a loan ‘not unsuitable’:
- A Reverse Mortgage credit contract will be unsuitable if the LVR exceeds 15% for a borrower aged 55 or younger, increasing by 1% for each year that the youngest borrower is older than 55. For example, if the youngest borrower is 60, an LVR that exceeds 20% is unsuitable unless the contrary is proved. If the youngest borrower is 70, an LVR that exceeds 30% is unsuitable unless the contrary is proved.
- Section 133DB of the NCCP Act provides that before making a credit assessment, you must show the borrower, in person, projections of how much the interest will amount to over the life of the Reverse Mortgage (calculated using an ASIC approved website) and give the borrower a copy of these projections.
This is important because frequently there are no repayments on a Reverse Mortgage and the interest compounds. That means your customer will pay interest on the interest and also on any fees or charges that may be added to the loan. Over time, this can add up to be quite substantial and your customer needs to be aware of the actual costs involved.
As a finance broker you must give the borrower a ‘Reverse Mortgage Information Statement’ before making a credit assessment and if requested. This explains the impact of interest capitalisation on equity in the mortgage’s property.
As always, the Connective Compliance Team is here to help you on your compliance journey and we are available to answer any questions you may have. Please feel free to contact us at firstname.lastname@example.org if you have any questions and we’ll be happy to help.