Reverse Mortgages Grow by 5 Times in Australia Since 2019

The Australian government’s reverse mortgage program – also known as the Pension Loans Scheme (PLS) – has grown by five times since data was recorded two years ago, as more Australian retirees are seeking new ways to facilitate cash flow in retirement while aging in place in their existing homes. This is according to a story published recently by the Sydney Morning Herald.

“Just 768 people had accessed the scheme at the end of the 2018-19 financial year but their numbers swelled to 4039 by the end of March this year,” writes reporter John Collett.

Described as being “conservatively managed” currently, the Australian government will soon impose what it calls a “no negative equity guarantee” on the PLS which appears to function similarly to the non-recourse feature that is a part of most American variations of a reverse mortgage loan, including the ubiquitous Home Equity Conversion Mortgage (HECM) program administered by the Federal Housing Administration (FHA).

Maximum cash that can be accessed as a part of the PLS currently sits at 150% of the Australian government’s full age pension, and the loan proceeds can only be currently distributed in a series of ongoing disbursements. However, access to a lump-sum disbursement model – up to two lump-sum advances in any 12-month period, up to a total value of 50% of the maximum annual rate of the age pension – will be available to borrowers by mid-2022.

It is not yet clear if these new features, including both the lump-sum disbursement model and the “no negative equity guarantee,” will be made retroactively available to existing borrowers or will apply to new borrowers only, Collett reports.

Access to lump-sum payments could increase the potential attractiveness of the PLS for older Australians according to Katja Hanewald, Hazel Bateman and Katie Sun of the School of Risk and Actuarial Studies at the University of New South Wales (UNSW), Collett says.

“That is because many retirees would like to make large purchases, such as a new car, home improvements or repairs,” he writes based on UNSW data. “Figures cited by the academics show about two-thirds of PLS participants at the end of last year were full-rate pensioners, with most of the rest part-pensioners. Uptake by self-funded retirees is relatively small.”

However, the researchers are also open in their criticism of a component of the PLS, including its variable interest rate of 4.5% which they contend is too high, Collett writes.

“It is lower than private sector reverse mortgages but significantly higher than the record-low interest rates for regular owner-occupier mortgages,” he writes.

Late last year, reverse mortgage adoption rates had doubled in Australia, outpacing the government’s expectations for the program that were laid out in the 2018-19 national budget.

Read the story at the Sydney Morning Herald.

Editor’s Note: A previous version of this story incorrectly stated that the PLS was introduced in Australia in 2018. The PLS was introduced in 1985 and received a revamp in 1996. RMD regrets the error.

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