Concerns raised over home equity products

The home equity release industry has grown to provide many ways to access equity in your family home for additional retirement income.  

This can be very useful for retirees who, because of their age, cannot easily obtain loans from traditional lenders and need money to pay for medical care or home maintenance, or even for a dream holiday. 

A summary of the main equity release schemes is provided below. Each equity release variant comes with risks. 

Generally, while the property owners come away with cash for the here and now, and continue to own their house, the contracted lender gets a share of the proceeds from the property sale. 

But customer beware: what’s in the contract? Fine print? Share of proceeds? How is that amount determined?  

A recent investigation by The Guardian highlighted these risks and the dire consequences for some Melbourne-based retirees of signing up to an equity release option known as a home reversion plan. 

The plan provider says its contracts very clearly spell out the percentage of the sale proceeds that it will be entitled to when the house sells at the end of the contract. 

The key claim against the product is that selling earlier than the end-of-contract date delivers a much lower amount to the customer – and how the company determines that is complex and lacks clarity.  

Financial advisers and lawyers quoted in the article cautioned that the complexity of the contract was a barrier to older people at a time when they may struggle to understand what they were getting into. 

The article raises questions about how the product provider determines the sale price on early sales. It seems factors include rising/dropping house prices, age of the customer and house valuation at time of contract and at sale. The company urges customers to read the contract carefully. 

Financial experts said a simple way to understand whether such a product is a good deal was to compare the numbers with how much an individual would have had to repay if they took out a simple reverse mortgage. 

The company providing the product said the advantages of its product over a reverse mortgage include: 

• A capped maximum share of proceeds that it will take 
• That if the property value falls, the sale interest “would move with the property value” 
• That, unlike with a reverse mortgage, the deal is unaffected by interest rate rises. 

The company said in a 2016 interview that many people are “not familiar with equity release products, and the time in their lives when they need them is perhaps not the time when they feel confident making big financial decisions”. 

It is a requirement that, before someone signs a contract, they first receive legal advice. 

The executive officer of Financial Counselling Victoria, Zyl Hovenga-Wauchope, warned that it is financial, not legal, advice that people really need before signing such contracts. 

“You need to be given advice about what options you have and if this is going to be in your financial interest. 

“The lawyers would say ‘this contract does what you’ve said you want it to do’, they wouldn’t be in a position to say ‘this isn’t the best financial product for you based on your circumstances’.” 

National Seniors Australia encourages seniors considering a home equity release product to seek financial advice from a registered professional.

Home Equity Access Scheme 

The Federal Government-backed Home Equity Access Scheme is available to people of pension age who own property to put up as equity. 

Homeowners borrow money secured against their property. If they don’t make payments, the debt compounds and is paid when the property is sold or the borrowers die.  

The current interest rate is 3.95% per annum. This rate compounds each fortnight on the loan balance until you repay the loan in full. Keep in mind, that the longer you take to repay the loan, the more interest will accumulate.  

You must repay the loan and all costs and accrued interest to the government. You can make repayments or stop your loan payments at any time. 

All loans have a negative equity guarantee. This means you won’t repay more than your home is worth (your equity). Exceptions may apply. 

Reverse mortgage 

Under a reverse mortgage, you stay in your home and don’t have to make repayments while living there. Interest charged on the loan compounds over time, so it gets bigger and adds to the amount you borrow. The interest rate is likely to be higher than on a standard home loan. 

You repay the loan in full, including interest and fees, when: 

• You sell your home

• You move out of your home, or 

• Your estate sells your home after you die. 

Home sale proceeds sharing (home reversion) 

“Home sale proceeds sharing” (or home reversion) allows you to sell a proportion (a “share” or “transfer”) of the future value of your home while you live there. You get a lump sum and keep the remaining proportion of your home equity. 

It’s not a loan, so you don’t pay interest. You pay a fee for the transaction and to get your home valued. The more your home goes up in value, the more the provider will receive when you sell it. 

Equity release agreement 

An equity release agreement allows you to sell a portion of the value of your home. You get a lump sum or instalment payments in return. You live in your home and pay fees for the portion you’ve sold – a bit like paying rent on it. Your proportion of equity reduces over time, to cover the fees you pay. 

It’s not a loan, so you don’t pay interest. Instead, you pay fees such as: 

• An application fee

• Periodic service fees, potentially deducted in advance from your home’s equity 

• A fee to end the agreement.

Other options 

If you need money, other options to consider include: 

• Government benefits. Check if you’re eligible for the Age Pension or government benefits. 

• No interest loan. This lets you borrow a small amount of money quickly for essential goods or car repairs. There are no fees. 

• Downsizing. If you’re thinking about selling your home and downsizing, consider the cost of buying and selling. Check if it affects your government benefits. 

• Other support. If you’re struggling to make ends meet, see urgent help with money for free services that can help. 

 

Links: The Guardian, MoneySmart