The Senior Australian Equity Release Association of Lenders, SEQUAL®, released its second comprehensive study of the reverse mortgage sector today.  Actuarial and advisory firm Trowbridge Deloitte undertook the research.

The SEQUAL/Trowbridge Deloitte Reverse Mortgage Study found that the reverse mortgage market at 31 December 2006 consisted of more than 27,500 loans with a total book size of just over $1.5 billion. 

Kieren Dell, Executive Director of SEQUAL, a not-for-profit member organisation governing lenders of reverse mortgages to seniors and providing consumer safeguards, said “Reverse mortgages are continuing to grow as a retirement financial planning tool. With market growth at 80% over the past year, the market is close to doubling every year.

“Currently at $1.5 billion, the outstanding book has continued to grow at an exceptional rate since we published our first six monthly study of the reverse mortgage market in October 2006.”

James Hickey, Trowbridge Deloitte partner who led the study said, “Of the borrowers, the 60 to 70 year olds are the fastest growing group, with under 65s accounting for almost 20% of new loans in 2006, and 65-69 year olds for 25%.

“The lump sum is the most popular draw down type in this emerging sector, whilst 70-80 years olds dominate the increasing use of regular draw downs.

“Of the $520 million worth of settlements in 2006, more than 80% were lump sum and just fewer than 20% were taken in regular draw downs.”

Kieren Dell added, “Variable rates are the most popular type of loan currently, but we are seeing an increasing use of fixed rate borrowings with 25% of new loans fixed rate compared with 22% in 2005 and 5% in 2004.”

James Hickey pointed out that there has been more growth in capital cities than the regions in the last six months and that couples and single females were the most common borrowers, although single male borrowers had in fact increased to account for 20% of settlements, up on the previous two years.

“This growth coincides with an increase in the number of product providers, providing improved product flexibility and wider distribution channels,” he said. 

A summary of the key findings are:

Size of market:

• settlements of new loans of $520m in the 12 months to 31 Dec 2006, compared with $315m in the 2005 year and $217m in the 2004 year with an average size of $54,200
• settlements represent around 73% of approved facilities granted to borrowers.

Channel:

• distribution is still largely direct with the lender, although sales via mortgage brokers and financial planners is growing
  • direct with the lender is the most common (more than 72% of all outstanding loans)
  • mortgage broker use is increasing as a percentage of the total (47% of all settlements in 2006 was done via brokers compared with 38% in 2005 and  17% in 2004)
• the average loan size is larger via brokers.

Borrowers:

• age of borrowers remains constant at 74 years, with 72 the average age for new borrowers
• no change in 45% of loans taken by couples, followed by single women which in 2006 was down to 30% of total loans from 40%, with single male borrowings increasing
• however single female borrowers account for more than 40% of new regular draw down business.

Type:

• the draw down type is dominated by lump sums, however there has been recent growth in regular draw down versions:
  • lump sum advances are the most popular (more than 80% of all outstanding loans);
  • regular draw downs are increasing (up to 20% in 2006)
• variable rate loans are the most popular, with a recent increase in fixed rate versions
  • variable rate versions make up the majority of loans (85%+ of outstanding loans as at 31 Dec 2006)
  • fixed rate versions are an increasing proportion (25% of new loans in 2006 are fixed rate)
  • fixed interest rate borrowers on average  draw $10,000 more than variable rate borrowers.

Location:

• most reverse mortgage business is sold in NSW (41%) down from 45% in 2005 with settlements still dominating at (40%) while VIC and QLD have around 20% each of the total market sold
  • WA continues to grow to 8% of the market with settlements standing at 13% of the market (more than doubling from settlements in 2005 of 6%)
  • SA has also grown as a proportion of reverse mortgage business sold (9% of the market).

Commentary on findings

“An increasing number of Australian retirees are recognising the benefits of reverse mortgages” said Kieren Dell.   “While the average age of our all borrowers is 74, the age for new borrowers is now 72, with an average loan size of $54,200.”

“The increasing use of regular draw downs indicates that these seniors are using the funds more and more to supplement their pensions rather than using their equity for one-off spending.

 “SEQUAL believes that it is often preferable for retirees to draw down funds on a regular basis, in order to better manage interest, which accumulates at a slower rate than with a lump sum draw down.

“It is interesting to note that in 2006 as well as in 2005, only around 70 percent of the total approved loans were accessed at the time of settlement. This indicates to us that many retirees want the security of knowing they have approved finance should they need ready cash,” said Dell.

Mortgage brokers and financial planners have significantly increased their share of the reverse mortgage market from just 17 percent of all loans in 2004, to 38 percent in 2005, commanding a 47 percent share of the market to 31 December 2006.

The broker share of market grew 5% in the six months from 30 June 2006 from the last comprehensive SEQUAL/Trowbridge Reverse Mortgage study.

Hickey said, “This trend continues to demonstrate the value customers place on advice and assistance when purchasing reverse mortgage products.

“Although most retirees secure reverse mortgages directly from lenders, with 72 percent, or more than $800 million loans issued directly, the use of intermediaries will continue to grow as financial planners become more involved in the sector.” 

Hickey believes that financial planners are ideally placed to advise on reverse mortgages as part of a holistic retirement planning for Australians.

“Brokers and planners have become more involved as the number of lenders has increased and pursued diverse distribution strategies,” said Dell. “However, this highlights the importance of educating intermediaries on the unique characteristics of reverse mortgages.”

SEQUAL has an accreditation standard and has accredited two courses (offered by the Mortgage and Finance Association of Australia and Bluestone Equity Release) which offer specialised training on reverse mortgages to intermediaries.

“As the reverse mortgage market grows, lenders are offering a larger range of products and retirees are shopping around for product features that best suit their lifestyle,” said Dell.

For more information about SEQUAL approved lenders and reverse mortgages go to www.sequal.com.au

Backgrounders on SEQUAL and its Code of Conduct are available