The problem of retirees being asset rich and cash poor continues among Australians, but a solution has arrived, writes Warren Gibson.
For the past 15 years there have been few if any options for home equity release for senior Australians other than a reverse mortgage or a complete sale and downsize, and senior Australians with only home equity to their name have been of little interest to many financial advisers.
This situation, however, is changing as increased property prices have resulted in many senior Australians’ home equity values dramatically increasing. However, while their net wealth may have increased on paper, it has not translated to investable funds that would interest most advisers.
Current equity release products have few friends in financial planning circles and are credit products, in the main, which require the planner to hold an Australian credit licence. There has not been an equity release financial product until now.
So where does that leave the senior cohort? Underserviced in both advice and product options.
While our advice community focuses on wealth accumulators, this group largely make their own way in life and finance, some downsizing, some taking up the reverse mortgage model and some the government pension loan scheme, but not many.
Most it would seem sit back and make do. It is this group that could be a significant market for advisers and there is growing support from seniors’ organisations, particularly since the government stopped funding the National Investment Centre for Retirement Income in early 2015.
Downsizing has captured the imagination of some seniors, but just as there is a sea-change/tree-change following, there is a growing trend to stay put in homes where seniors are comfortable and in areas with which they are familiar, often close to family and friends. And there are other good reasons to do so, including lifestyle and medical access among them.
This cohort are also the senior relatives of the wealth accumulators, whose advisers are in the box seat to help, if they had something they could offer.
Similarly, the children of the wealth accumulators are a great source of new business, if there was something advisers could offer them as well.
Enter fractional investment, a model that offers investment and equity release – fractional buying and fractional selling, if you like.
Fractional investment can work both sides of the room because it’s predicated on enabling vendors and investors to offer to buy or sell a fraction of an asset. This is achieved using a legal structure built on a platform that gives investors the ability to invest at a level they want, rather than have to purchase a whole asset.
As a result, young people with a small amount to invest and older people with a high-value asset can both participate.
This opens up a new market for financial advisers.
So how big is this market?
Seniors make up a significant proportion of our population, according to the Australian Institute of Health and Wealth. In 2017, over one in seven, or 15 per cent, of Australia’s population were aged 65 or older with a life expectancy of 20 years for men and 22 years for women.
That’s 3.8 million Australians, now estimated to grow to 7.5 million in less than 30 years – young planners take note.
Where is this market?
The states with the largest proportion of their population aged over 65 are, as expected, New South Wales and Victoria at 33 per cent and 25 per cent respectively. As a proportion of total population, most other states are not far behind:
- Tasmania, 19 per cent,
- South Australia, 18 per cent, and
- Queensland, 15 per cent.
This is not just a local phenomenon. Percentage-wise we are on a par with the United States and New Zealand, but below Canada, the United Kingdom, Greece, Italy and Japan, which are all showing similar growth patterns, so be assured this is a growing market.
Some may expect superannuation in Australia should increase retirement benefits and reduce the need to rely on home equity, but this is unlikely to kick in for many years, so there is an opportunity to add this specialisation to your business.
Equity release options
Home equity release, other than sale and downsize, has traditionally been a debt solution. Borrow against the property, interest capitalises over time and when you die or sell the property, the debt and interest are repaid from the proceeds.
This is not a particularly sustainable model owing to the supply of money and the length of time it may take to repay the debt. Populations are also living longer so the time to repay will likely be extended. As a result, reverse mortgages could potentially outlay tens of billions of dollars over many years with nary a repayment in sight for some time.
The global financial crisis (GFC) is a good example of how fragile the money supply can be because there is a mismatch of time horizons, that is, lending short-term money to long-term borrowers.
This mismatch was largely responsible for most of the reverse mortgage lenders ceasing business in this space in the early 2000s.
The popularity of reverse mortgages has also remained low because of the unknown quantity of variable interest rates over long periods of time and postcode limitations. Most reverse mortgages will only lend to people in specific postcode areas.
A reverse mortgage, however, may be the right solution, depending on the senior’s circumstances.
Enter a new model
A model that involves an equity sale appears a far better solution because it becomes a simple matter of rent and equity sharing, rather than debt repayment. If you sell 15 per cent of your home and retain 85 per cent, you are effectively renting 15 per cent of the property.
This is a more compelling model, particularly where beneficiaries are a consideration and rent can be set, giving the senior a more predictable outcome.
The only organisation currently offering the equity model is DomaCom, but it is an investment product built on a registered managed investment scheme legal structure and as such needs approved product list approval, which limits its usability among licensed financial advisers.
But therein lies the competitive advantage.
For consumers, the regulator has ensured that, while both models are very different in their structure, they include similar protective features. So it comes down to which model is most appropriate for the individual’s circumstances.
Here are a few of the features and benefits of the seniors equity release (SER) model, some of which are shared with the reverse mortgage model:
- vendors must be aged 60 or older and own their home,
- only the principal place of residence can be used for an SER,
- maintenance and insurance is shared between the equity owners, in proportion to their holding,
- vendors have a permanent right of abode, with a fixed fee for life,
- vendors can rent the home out and keep 100 per cent of the rent they receive,
- vendors retain the title,
- investors are protected by a caveat over the property,
- there are no postcode restrictions in the DomaCom model,
- equity can be taken as a lump sum or a staggered settlement – a flexible monthly payment, and
- there are termination options available.
Vendors can use funds for almost any purpose: travel, home improvements, retiring debt or helping family members, and the choice of a lump sum or staggered settlements means they can budget well into the future, with the flexibility to dial up regular payments to meet commitments and dial them down when not necessary.
No discussion about equity release is complete without addressing risk, so below are the key issues to consider.
The model has been structured to provide investors with a fixed 4 per cent rental income plus a share of the future capital value.
In residential terms, this is a good yield, particularly in capital city locations.
In terms of attracting investors, a strong driver for this will be financial advisers, where clients who have an SMSF could use part of it to invest in a parent’s home, thus giving the SMSF an investment and the parent some equity release. To this extent it can be viewed as an effective intergenerational strategy and one where the family home can be effectively retained within a family unit.
Loss of control over decisions to change any physical aspect of the property is an issue. Approval may be required from the fund depending on the proposed changes.
Diminishing equity is an issue in any equity release facility. A reverse mortgage will diminish equity because of the compounding effect of interest and this equity-based model is similar, as rental payments must be made to the investors, which will normally involve an additional equity sale every five years to top up the rental payments and platform fees.
A reduction in Centrelink payments is a consideration where a lump sum payment is made to the vendor.
Termination fees may be an issue in the event the vendor wants to buy back the equity they have sold.
How can you get involved?
A good start would be to ‘tool up’ by aligning yourself with specialist providers, such as Aged Care Gurus or Aged Care Steps, that are geared for this space, have years of experience and are keen to work with you in whatever capacity best suits you and your practice.
If you want to provide strategic advice and that involves equity release, then you should be looking to accredit yourself with the available products. SER is a product of DomaCom Australia, with which accreditation is essential. Reverse mortgages similarly have an accreditation process.