Reverse Mortgages Policy

Transcription

1 Reverse Mortgages Policy March 2014 Version Date 2 November March 2014 Document owner Professional Standards Professional Standards Approved by RI Compliance Committee Date of approval 22/11/2012 Next review date November 2013 November 2014 Reason for current review General review and update Heritage review and update RI Advice Group Pty Ltd ABN AFSL

2 Contents Preface...2 Purpose...2 Authorisation...2 Advice limitations...3 What is a reverse mortgage?...3 Product features...4 Benefits of using a reverse mortgage...5 Appropriate type of clients...5 Risks and considerations...5 Advice documentation...8 Further information...9 1

3 Preface At the time of writing (March 2014), RI Advice Group and its authorised credit representatives are expected to cease to offer new credit assistance after 31 March This Policy contains information that is relevant to credit assistance advice and also to arrangements that are expected to apply from April This document will be further updated during Purpose The following guidelines outline the advice requirements when a reverse mortgage is being recommended. Reverse mortgages are governed by the National Consumer Credit Protection Act 2009 ( The Act ). These guidelines form a part of RI s professional standards, policies and procedures. The Advice Assurance team will refer to this policy when reviewing client files incorporating reverse mortgage advice. Authorisation Authorised Representatives who wish to provide product specific advice in the specialist area of reverse mortgages must get appointed as Credit Representatives of RI Advice Group s Australian Credit License (ACL). Key issue Please refer to the Credit Activities Policy for details on the process for becoming a Credit Representative and what obligations need to be met as a credit Representative of RI s ACL. 2

4 Advice limitations Reverse mortgages fall within the definition of credit under The Act and are defined by ASIC as a complex type of credit contract. Authorised Representatives can make general strategy recommendations for a client to take out a reverse mortgage. Providing the recommendation does not refer to a specific reverse mortgage or refer the client to a specific lender, the requirements of the Act do not need to be met. On the other hand, if an Authorised Representative recommends a specific reverse mortgage product or refers the client to a specific lender that provides such a product, then the requirements of The Act would need to be met, including the need to be an Authorised Credit Representative. RI Advice Group s advisers are not permitted to complete no advice transactions with respect to reverse mortgages. Further, reverse mortgages should only be considered as a strategy after all other options have been considered. What is a reverse mortgage? A reverse mortgage is a mechanism enabling asset rich, income poor clients to access the equity value of their home to support their quality of life in later years. If a reverse mortgage is recommended and unsuitable for a client, the consequences for the client can potentially be significant and severe. How reverse mortgages work Reverse mortgages allow older people to borrow cash against the value of their home. Repayments usually don't usually have to be made until the client leaves to move into aged care, sells their home or dies. When the loan ends and the home is sold, the client or the estate must repay what's owing out of the sale proceeds. Each year the fees and interest that the client would ordinarily pay are added to the loan. Over time, theclient is charged interest on the interest (or compound interest) which builds up the total amount that the client owes. Example Assume a client s home is currently valued at $400,000 and will increase each year by 3%. The client takes a reverse mortgage of $100,000 (including fees and charges) as a lump sum. The following table shows what the client could owe at age 80 assuming an 8% annual interest rate. 3

5 Source: MoneySmart Reverse Mortgage Calculator. Assumes home value increase and interest rates are constant for duration of loan. The effect of compound interest is dramatic and, as can be seen in the graph above, a loan can more than quadruple in around 20 years. If interest rates increase during the life of a variable rate loan, a client could end up owing even more. The impact of a reverse mortgage can be reduced if: The client s home increases in value, or The reverse mortgage allows the client to draw down amounts as needed rather than taking a lump sum upfront. Reverse mortgage providers There are many reverse mortgage providers in the Australian market, but only some of these are members of SEQUAL and have products backed / owned by the major Australian banks. SEQUAL is the Senior Australians Equity Release Association of Lenders, established in January This body has established a Code of Conduct aimed to protect borrowers and ensure the promotion of responsible product structures and design features. Credit representatives can only recommend reverse mortgage products issued by or backed by the 4 major banking institutions (ANZ, CBA, Westpac and NAB) and who are members of SEQUAL. Product features Following is a summary of some of the key features of reverse mortgage products currently in the market. You will need to confirm the features of specific products with the issuer. Maximum loan to value ratio (LVR) The maximum LVR allowed depends on the age of the client and the property value at the time the loan is taken out. For a 60 year old client, the maximum LVR is generally around 15% of the property value. As the client s age increases, the maximum LVR increases. For a 90 year old client, the maximum LVR may be as high as 45%. 4

6 Maximum loan amounts Most products will have a maximum loan amount, which is in addition to the LVR cap. Accessing funds Products may allow a client to access reverse mortgage funds as a lump sum, regular payments or as a combination of both. Some products offer a cash facility which enables the client to draw funds at any time as they need it. No negative equity guarantee Negative equity occurs when the loan amount increases to a point where it is greater than the value of the client s house. Historically, some products offered a No Negative Equity Guarantee which guarantees that the client (or their estate) will not be left in debt after repaying the reverse mortgage, even if the outstanding loan is greater than the sale price of the home. On 18 September 2012 the Government introduced negative equity protection on all new reverse mortgage contracts. This guarantee is usually dependent on the client meeting the terms and conditions of the loan, which generally include clauses that the home is kept insured and well maintained. Equity protection Some products allow the client to protect a percentage of net proceeds from the sale of their home. For example, if a client chooses to protect 20% of the value of their home, this means they will have a right to 20% of the value of their home at the time of sale regardless of the change in value of the property. Benefits of using a reverse mortgage The client has access to cash, as a lump sum, a regular income stream, or a combination of both. The client doesn t need a current income to qualify. The client is able to stay in their home longer. Extra funds will allow the client to cover maintenance costs or make improvements or adjustments to the home to meet changing needs. Repayments are generally not required on the loan until the property is sold or no longer occupied (eg upon death or moving into an aged care facility). Appropriate type of clients A reverse mortgage may be appropriate for clients who: are aged 60 or over; are retired, or approaching retirement; need extra money for a specific reason; are cash poor but asset rich because they own their own home; or want to avoid selling their home. Risks and considerations When considering a reverse mortgage, the following factors should be considered. 1. Suitability of a reverse mortgage ASIC s RG 209 (Credit licensing: Responsible lending conduct) provides some guidance for determining the suitability of a reverse mortgage for a client. The following is an extract from RG 209. We would expect a high standard of investigation and verification to ensure a reverse mortgage 5

7 product meets the consumer s requirements and objectives. For example, because of the potential impact of a reverse mortgage on a consumer s eligibility for Centrelink payments, we consider that an inquiry into a consumer s eligibility to receive these payments is an essential component of this investigation and verification. We would also expect a high standard of investigation and verification as to the consumer s understanding of the contract and its possible consequences. Key issue Aside from completing a thorough investigation of the client s current circumstances, advisers should also enquire about possible changes to the client s future circumstances as reverse mortgages can be inflexible. For example, will the reverse mortgage cater for the client downsizing? 2. High interest costs Interest rates on a reverse mortgage are usually higher than average home loan rates. In addition, clients must be made aware of the impact of compound interest which can cause the debt to rise more quickly than non-compounding loans. Key issue Compounding interest can cause a debt to quickly rise to the point where the debt is more than the value of the client s home. 3. Onerous ongoing obligations A reverse mortgage contract may impose ongoing obligations on the client, such as maintaining the property to a certain standard. It is imperative that the client understands these obligations as if these are not continually met the client may be at risk of being evicted by the lender. You should discuss with the client how they will cope with these requirements over time, in particular if they become onerous and/or expensive. 4. Impact on others Advisers should recommend clients discuss the reverse mortgage with any parties who may be affected by the decision prior to implementing the arrangement. Affected parties may include: other people living in the home where your client is the sole owner of their home, other people living in the home may not be able to continue living there if the client moves or dies (as the lender may require the home be sold). potential beneficiaries a reverse mortgage will deplete the amount available for distribution from the client s estate. Discussing this with potential beneficiaries in advance can help to reduce potential disputes and claims after death. 6

8 5. Centrelink impact Centrelink clients (or those who may become eligible for Centrelink in the future) must be made aware if a reverse mortgage could affect their entitlement. Income test Under the Centrelink income test, a lump sum amount drawn from a reverse mortgage is not, in itself, counted as income. However the income test may apply depending on how the money is used by the client. For example: if the money is placed into a financial investment (such as a bank account) or gifted in excess of the gifting limits, then the deeming provisions will apply. if the money is spent on a holiday or renovations to the principal home, then there is no effect on the income test. Asset test Under the asset test, the amount of a reverse mortgage that has been drawn down, but not yet spent, is assessed as follows: The first $40,000 is an exempt asset for 90 days, and The excess over $40,000 is counted as an asset when funds are received. Once the client has spent the money, the asset test may apply depending on how it was used. For example: if the funds are invested into a financial asset (such as a bank account) or used to acquire a car, then the assets test will apply. if the funds are spent on a holiday or on renovations to the principal home, then there is no effect on the asset test. Accessing reverse mortgage funds as regular income instead of as a lump sum can result in less impact on the assets test. A reverse mortgage does not impact a person s home ownership status for Centrelink purposes. 6. Aged care impact Clients should be made aware of the impact a reverse mortgage can have on future aged care needs. Many people use the sale proceeds of their home to fund an accommodation bond when moving into low level care (hostel). Taking out a reverse mortgage reduces the value of the client s home upon future sale (sometimes to nil), thereby reducing the amount available to cover the cost of an accommodation bond. Although aged care facilities are generally required to take a number of concessional residents, a person is at risk of missing out on gaining entry into their preferred facility if they do not have sufficient assets to cover the bond. A reverse mortgage will also mean a client is not in a position to gain rental income from their home after moving into aged care if the home has to be sold to repay the mortgage. 7. Negative equity risk Where a reverse mortgage product includes a negative equity guarantee, there is a risk that a client may lose this protection if the terms and conditions of the loan are not met, for example if the home is not maintained to a standard set by the lender. 7

9 8. Alternative strategies Consideration should be given to other options for the client, such as: repaying some or all of the interest on the loan, to prevent the ballooning effects of compound interest; borrowing money from children (or other potential estate beneficiaries), as they may prefer to provide a loan to the client and preserve the value of their future inheritance; sell the home, buy something smaller or move in with children; reduce expenses. Advice documentation Advice document Your recommendation to use a reverse mortgage must be documented in a Statement of Advice (SoA). The SoA should address: why a reverse mortgage is suitable for the client; confirmation of the proposed use of funds, in particular to confirm that the funds are required to remedy a lifestyle cash flow deficit and not for investment purposes; a clear explanation of: o how reverse mortgages work; o the risks associated with reverse mortgages; o the benefits to the client; consideration of the client s health and life expectancy; consideration of the client s needs, objectives and future plans; the impact on current or potential eligibility for Centrelink (or DVA) pensions and benefits; the impact on future aged care needs; a recommendation that the client discuss the impact of the reverse mortgage with any parties that may be impacted (such as family members who may benefit from the client s estate); consideration of the effect of changing house values; consideration of alternatives to a reverse mortgage; and any other associated risks and considerations. This is in addition to the disclosure document requirements outlined in the RI Credit Activities Policy such as a quote for providing credit assistance. Please refer to the RI Credit Activities Policy for further details. Projections Your projections can be prepared in Xplan by clicking yes at Liabilities > Loan Details > Model Reverse Mortgage. Alternatively you can prepare simple projections using the ASIC reverse mortgage calculator. Your projections should clearly show: the effect on the client s equity in their home. This should include projections showing the impact on equity based on current interest rates as well as if interest rates increase by 1% and 2%; and all costs associated with the reverse mortgage. Key issue Advisers should be conservative when using assumptions about housing values and the amount of equity a client should access. If property values don t increase as much as assumed, the client may end up with less money than expected after selling their home. Strategy Text and Incorporated Material Strategy Text and Incorporated Material are available in Xplan for use in your SoA. The Incorporated Material provides the client with additional information on reverse mortgages. Please note that both the Strategy Text and the Incorporated Material must be provided as part of the advice document. Only RI Advice Group approved text is to be used in your advice documents. 8

10 File Notes When recommending a reverse mortgage, a comprehensive file note (electronic or paper based) must be prepared and maintained on the client file to document that issues outlined in this guideline have been discussed and addressed. Further information Further information on the rules and implications of reverse mortgages can be found in the following locations: Source Information OnePath Technical Technical bulletin TB54 Reverse Mortgages Guide to Social Security Law Assessing Home Equity Conversion Loans MoneySmart guide Thinking of using the equity in your home? MoneySmart Reverse mortgage calculator Reverse mortgage calculator 9