Exploring Home Equity Release Options for Retirees Opportunities for optimising Retirement Income.

Transcription

1 Exploring Home Equity Release Options for Retirees Opportunities for optimising Retirement Income. Dr Ashton de Silva, Dr Stuart Thomas, Dr Farzad Alavi Fard and Dr Sarah Sinclair.

2 The Challenge: An aging population Shortfalls in retirement savings Lack of household interest in retirement saving plans Older people wanting to age in their own home Potential inclusion of housing in the means test for the Aged Pension 2

3 The Population Challenge (IGR) 3

4 The Curse: Asset rich but income poor A high proportion of Australian seniors own their own homes but cannot (easily or willingly) access the equity in their own homes to fund their retirement 4

5 IGR Projections 5

6 The Cure? Can releasing equity be the solution? Tentatively, an important part, but not the silver bullet New financial products, advice tailored to cash flow in the later decumulation phase, and regulation for housing equity decumulation, might contribute to maintaining a decent quality of life for older Australians, particularly when other sources of income have diminished. Johnson et al (2015) Our Brief: To explore the potential of the equity release market in Australia. With house prices rising steadily and the costs of borrowing at historically low levels, reverse mortgages are an increasingly attractive investment option for retirees. Compared with selling a house and losing all or a large part of pension entitlement, a reverse mortgage can yield higher returns than alternative investments. Retaining the home costs less than renting even after allowing for the expenses involved. Brisbane Times March 6 th

7 The Products 1. Reverse Mortgages Financial contracts that allow a homeowner to consume some of the home equity but still maintain ownership and residence in the home 2. Equity Release Programs (Homesafe) Home Reversion Products: a proportion of the home equity being sold and the senior homeowner retaining the right to continue living in the home. 3. Segmented equity release (Domacom) Similar to 2 in that an equity share is sold but an investor buys directly into a specific property. 7

8 Product Detail Guide Typical Home Mortgage Reverse Mortgage Equity Release Segmented Equity Release Consumer objective Outright property purchase Supplement retirement savings Supplement retirement savings Supplement retirement savings Consumer Receives Lump sum to purchase property Lump Sum/ Income Stream Lump Sum Lump Sum or partial settlement Provider Receives Regular Interest Rate Chargers Receive a % of sales proceeds of house % of property on the point of sale (within 12 months of departure % of property on the point of sale (within 12 months of departure Consumer Age Profile Approx 70% below 44 Greater than 60 Greater than 65 TBC Amount $300K % of property value TBC TBC 8

9 Product Feature Guide Qualify Duration Interest Charges Termination Number of Providers House price movements Typical Home Mortgage Income. Wealth underwriting standards Fixed (max) duration Standard Variable Payed off loan Reverse Mortgage Home Equity Equity Release Equity in a blue chip area. Segmented Equity Release Not confined to blue chip. Undefined Undefined Undefined 1% above variable Property departure None Property departure TBC Many Five One One Consumer Provider/Con sumer Provider Property departure Investor and retiree 9

10 Consumers are found wanting Awareness Little advertising by reverse mortgages providers. Lack of known brands offering products. Understanding Interest rate uncertainty concerns about compound interest, lack of understanding of the reversionary interest the life interest components of a home. Economic imperative vs emotional attachment Emotive issues around the family home. Incentive structure No compulsion/government encouragement. 10

11 Supply side is thin Little competition Five RM providers (Down from 15 prior to GFC) One home equity provider (another coming soon) Economic rationing Less funding for reverse mortgages after the Global Financial Crisis (GFC). Inefficient use of capital to fund equity release products for some providers. Regulatory burden Complicated operating environment under existing legislation for home reversion schemes. Loan to Valuation Ratios (LVRs) on offer are low. 11

12 Risks Factors Macro Risks 1. Long term interest rates; and 2. Longevity 3. Prudential regulatory requirements Product Specifications Risk There are two ways in which a reverse mortgage differs from other fixed income securities. 4. Default risk 5. Likelihood of an unanticipated termination 12

13 Product Risk To exhibit this, we price a bond, a mortgage, and a RM under the following assumptions: Continuous time finance Stochastic interest rate(cir model) Life of 10 years for each product Unanticipated terminations is modeled by a Poisson process: McConnel (1981) 13

14 Product Risk: Elasticity of price ( ) 15 Price Elasticity Series1 10 Series2 Series % 3% 4% 5% 6% 7% 8% 10% 15% 20%

15 Where to from here 1. What are the perceived inhibitors to the development of this market? 2. What are the main risks from consumer, supplier, regulators and society perspectives? 3. What strategies could be undertaken to assist in the development of the market? 15

16 Consumer Scenarios Life cycle theory Assuming a consumer has an income gap Several exits from (independent) living Death Retirement Village High-level Care (Several stages of this) Other 16

17 Health warnings 17

18 Troublesome Calculation Assumptions: $50,000 loan at age 60, no regular withdrawals, interest rate of 10% calculated and charged monthly, $1200 establishment fees, $9 monthly fees added to loan balance. 18

19 Resources consulted so far Critical discourse of media. Select Industry practitioners Review of industry secondary data. E.g. SEQAL Institute of Actuaries UK equity release council. Academic literature U.S. centric A little bit on UK Comparatively little Australian Literature 19