Banks taking 'tick-box' approach to reverse mortgage risks: ASIC
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Banks taking 'tick-box' approach to reverse mortgage risks: ASIC

Banks have been granting reverse mortgages that risk eroding retirees' wealth without checking how they'll afford future costs such as aged care, the corporate cop says.

In a report on Tuesday, the Australian Securities and Investments Commission (ASIC) said many customers did not understand the risks of such loans, and as the population aged, banks needed to lift their game in making sure the products were not mis-sold.

ASIC says lenders need to do more than "tick boxes" when approving reverse mortgages.

ASIC says lenders need to do more than "tick boxes" when approving reverse mortgages.Credit:Jessica Shapiro

The ASIC review, which drew on data from 17,000 loans, also highlighted a lack of competition that might be inflating interest rates and fees, and said some loan contract terms were skewed in favour of banks, despite being subject to unfair contract laws.

Commonwealth Bank, which dominates the market after Westpac and Macquarie pulled out last year, said it would closely consider the regulator's findings and recommendations.

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Reverse mortgages allow people aged over 65 to borrow against the equity in their home, and typically, do not need to be repaid until the customer sells the home or dies.

Because of the compounding of interest, and the fact these loans have higher interest rates than regular mortgages, they can erode a significant chunk of the customer's equity in their home over a long period.

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ASIC said reverse mortgages served a purpose for older Australians who were asset-rich but cashflow-poor, but the risks of such products were poorly understood by consumers. Banks were also not doing enough to ask customers taking out the loans about the impact on their future needs, such as paying for aged care, or leaving money to their estate.

ASIC said 92 per cent of the 111 loan files it reviewed showed no evidence the broker or bank had discussed how the loan would affect the borrower's ability to afford possible future needs.

"Inquiries made by licensees lacked sufficient detail and followed a ‘tick-box’ formula. Lenders also did not document any inquiries about whether borrowers had a short-term exit strategy or intended to remain in the loan indefinitely," the report said.

ASIC's review of reverse mortgages looked at loans sold by Bankwest, CBA, Macquarie Bank, Westpac and Heartland Seniors Finance, which between them account for 99 per cent of loan approvals in recent years.

Interest rates are typically about 2 percentage points higher for reverse mortgages than other products, ASIC said, and fees were also higher.

All five lenders' loan contracts had terms that had "the potential to be unfair" and four of the five made no or minimal inquiries about the customer's financial situation, and whether they could meet their loan obligations without facing hardship.

Katherine Temple, a senior policy officer at the Consumer Action Law Centre, said: "From our perspective, it reflects broader systemic problems with irresponsible lending by the banks across various types of credit products."

Reverse mortgages are worth $2.5 billion, a tiny fraction of a home loan market of more than $1.6 trillion, but with life expectancy rising, banks say there is a genuine market for the products among older Australians looking to tap into their equity.

Reverse mortgages gained a poor reputation after the global financial crisis, when some customers found themselves owing more than the value of their home.

In 2012, the government responded by mandating tighter loan standards so that borrowers cannot end up in negative equity, and in this year's budget boosted the government-run Pension Loans Scheme, which is similar to a reverse mortgage.

Senior information officer at National Seniors Australia's financial information desk, Basil La Brooy, said the group received relatively few complaints about reverse mortgages.

"I don't see it as a major issue," he said, adding that banks were working to improve their discussions with customers about the risks.

Banks say that due to the complexity of reverse mortgages and the relatively small market size, and the negative perception of the products, there are questions over whether it is worth banks' while to offer these loans. It is understood Westpac hit the pause button on new lending in part due to the regulatory uncertainty.

Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.

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