An ageing population, a cost-of-living crisis and millions of dollars' worth of untapped equity in the housing market. Conditions seem right for the big banks to take on reverse mortgages, but they’re not. Emma Hatton reports.
The big banks have no interest in delving into the reverse mortgage market, despite some providers predicting demand for the product will only increase.
Heartland Group last week reported a record full year profit, driven in part by double digit year-on-year uptick in its reverse mortgage, or equity release, product.
New Zealanders who have cashed in on the product now owe $721 million, with new businesses in the second half of the year up 17.6 percent on the first half.
It also offers reverse mortgages to Australian customers under its Heartland Finance arm. Customers there have borrowed to the tune of $1.24 billion.
The bank’s general manger for reverse mortgages Andrew Ford said the bank has a specialist team to handle this product. "And as a niche product, it does require quite significant investment and bespoke systems and processes.”
“We started writing loans in 2004 and not all of those loans have been repaid to us yet. So, you've got to have a really long-term view on this to be successful.” – Andrew Ford, Heartland Bank.
A reverse mortgage gives customers who own their homes freehold the opportunity to draw down some of the equity in their property without having to sell.
The loan can be repaid once the house is sold but accumulates interest until this happens – usually at a higher rate than what would be set under a fixed residential mortgage.
Ford said most people who took out the loan used it for home improvements, to pay off other debt or to bolster their everyday costs of living.
None of the major banks in New Zealand or their parent companies in Australia offer the product.
ASB left the New Zealand market in 2015 and its Australian parent Commonwealth Bank was the last big bank across the Tasman to leave in early 2019.
Westpac and Macquarie left in late 2017.
The banks faced criticism from the Australian Securities and Investments Commission in 2018 for, among other things, failing to consider what the loans would mean for borrowers in the long term and with providing contracts containing potentially unfair terms.
The sting remains with Heartland’s 2022 investor presentation including “reputational risk” as a drawback for the product.
“Reverse mortgage loans are also an area of heightened potential reputational risk. Heartland has comprehensive origination procedures and lending standards which aim to eliminate any source of potential reputational risk, but there is a chance that those lending standards may not operate effectively on occasion and that Heartland could be exposed to reputational risk,” it said.
Ford said this was why it was crucial to be a specialist.
“We're really proud of our reverse mortgage product and the reputation we've built. It is a real core part of our business. For other banks, where reverse mortgages would be a small part of their overall offering, they might have a different view on the impact of that on their reputation.
"But for us, because it's such a big part of our business, our reputation is very aligned to the product and we think we've got great protection in place for our customers and a lot of flexibility in a process that ensures that customers make an informed decision and that's why we're pretty comfortable with it.”
"There's got to be sufficient demand to make it worthwhile putting the resource into developing it, and offering it." Claire Matthews, banking expert.
He said conditions were ripe for continued growth, but did not see other banks cashing in on it.
“There's increasing indebtedness in retirement, and the ageing demographic are all positive signs for reverse mortgages... but I believe that reverse mortgages are a fairly niche product, relatively small compared to regular home loans and for a number of reasons I think it suits a specialist provider."
However, Massey University banking expert Claire Matthews doesn’t write them off so easily.
“If they can see a way of generating a profit, then they're going to do so. But it is a specialist product, and therefore, there's got to be sufficient demand to make it worthwhile putting the resource into developing it, and offering it.”
She said ultimately there was not the demand in the New Zealand market at this stage to warrant the big banks getting in, but nothing could ever be taken off the table completely.
She said smaller players, like Heartland, were well-suited as it gave them a point of difference.
“They would struggle to directly compete against the big banks in the main retail market. So, offering a product that they're not offering gives them that point of difference.
“And they can offer that and say, you know, if you want to reverse mortgage, then you basically need to come to us because you can't get it from your bank.”
But smaller, specialist players need to be careful. Reverse mortgage loans aren’t paid back at all until the home is sold and the equity is released. Meaning unlike a standard loan the lender doesn’t get regular payments to supplement their other business.
Ford said they were still sitting on loans that had been taken out almost 20 years ago.
“We started writing loans in 2004 and not all of those loans have been repaid to us yet. So, you've got to have a really long-term view on this to be successful.”
A non-bank lending attempt in Australia recently fell flat with reverse mortgage company Boomer Home Loans placing itself into voluntary liquidation just months after its launch.
Liquidators said there were excellent growth prospects given the demographic trends in Australia, but new funding was required to support the planned loan book.
In New Zealand, Heartland customers borrowed an average loan of $117,000 which was about 10 percent of the value of their home.
The average borrower was 78 years old. SBS Bank also offers the product.
