ASIC has published a Review of reverse mortgage lending in Australia REP 586.

The aim of ASIC’s review was to examine the market after the introduction in 2012 of enhanced responsible lending obligations and consumer protections for reverse mortgages (including the no negative equity guarantee). Background.

The review found borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs.

About reverse mortgages

A reverse mortgage is a credit facility that is usually secured against residential property. Reverse mortgages are a type of ‘equity release product’ as they allow borrowers to release the equity in their home without losing possession of the property. They are the only type of equity release product that is regulated as a credit product under the National Credit Act.

With a reverse mortgage, borrowers do not need to make repayments until a specified event occurs (such as when all borrowers under the loan have vacated the property or passed away).

As there are no regular repayments required, interest compounds.

These products are one of the main options available to older Australians who want to draw on the equity in their home while continuing to live in their property.

However if the borrower vacates the property or passes away, borrowers or their estate can often only afford to pay off the loan balance of a reverse mortgage by selling the secured property. This can require non-borrowers still living in the home to move out unless the contract contains a ‘tenancy protection’ provision allowing them to remain in the home for a period of time. Lenders must give potential borrowers a prescribed tenancy protection warning if the loan does not include a tenancy protection provision.

The review

ASIC’s data analysis indicated that the market for reverse mortgages is highly concentrated. Application fees, transaction fees and interest rates for reverse mortgages were generally higher than for other types of consumer credit, such as standard home loans.

For ASIC’s review, it assessed five groups of lending brands separately:
(a) Bankwest;
(b) Commonwealth Bank;
(c) Heartland Seniors Finance;
(d) Macquarie Bank; and
(e) the Westpac brands comprising St George Bank, the Bank of Melbourne and BankSA.

Westpac and Macquarie ceased reverse mortgage lending in late 2017.

Terms and conditions
The standard form terms and conditions in reverse mortgage contracts are subject to laws which prohibit unfair contract terms.

ASIC reviewed the most recent version of each lender’s standard terms and conditions provided to ASIC.

It found all five lenders’ contracts contained terms that have the potential to be unfair, including:
(a) entire agreement clauses in three lenders’ contracts;
(b) a broad indemnification clause in one lender’s contract that they have agreed to remove;
(c) broadly drafted unilateral variation clauses; and
(d) clauses of non-monetary default that potentially allow lenders to take actions that are disproportionate to the nature of the breach.

Recommendations for further action

ASIC’s report recommends further action for lenders to improve their approach to meeting the responsible lending obligations and to address the risks for consumers when they make decisions about potential reverse mortgages including:

• Lenders should document more detailed inquiries about consumers’ future needs and objectives, including (but not limited) to their needs and objectives for aged care and inheritance.
  Applications and questions in loan interviews should be framed in ways that facilitate genuine discussion and reflection by the borrowers about these issues. If a borrower cannot afford or locate a paid financial guidance, lenders should refer them to free information sources where appropriate.
• Lenders should implement training and have effective procedures in place to detect and address possible instances of financial elder abuse.
• Lenders should inquire and record whether a consumer needs tenancy protection, or whether the loan should have several borrowers. If a borrower wants to protect a non-borrower resident, without tenancy protection the loan may be unsuitable.
• Lenders should remove potentially unfair contract terms.