Chinese experience informs our reverse mortgage market
Consumers need a better explanation of how an equity release product can work
Older Australians could be more likely to use reverse mortgages if they were flexible and easy to understand, and if they were marketed to both older residents and their adult children, according to research done by UNSW Business School.
In the face of an ageing population, and with only 62% of couples and 38% of single people on track to reach a comfortable retirement despite many of them owning their own homes, reverse mortgages should be a viable source of income, says economist Katja Hanewald.
Hanewald, a senior lecturer in the school of risk and actuarial at UNSW Business School, specialises in designing retirement products and says there “is a real-time experiment happening in front of us,” about how to fund our retirement.
“And housing wealth could play an important role,” she says.
A reverse mortgage enables homeowners to access their home equity; they can borrow without having to make repayments while living in the home. A reverse mortgage can complement superannuation and the age pension as a financial resource in retirement.
Hanewald and her colleagues at the ARC Centre of Excellence in Population Ageing Research (CEPAR) turned to China to study the demand for reverse mortgages. China has one-quarter of the world's senior citizens and a booming housing market.
Taking advantage of those two factors, in 2014 China's Happy Life Insurance Company introduced a reverse mortgage product to four Chinese cities (Beijing, Shanghai, Guangzhou and Wuhan). It was extended to other major cities in 2016 and then nationwide in August 2018.
But it failed to fly – by last April, only 133 households had signed up among China's massive population.
Research by Hanewald, CEPAR deputy director and professor Hazel Bateman, professor Hanming Fang from University of Pennsylvania and Shang Wu from First State Super, has found that Happy Life’s product was both complex and inflexible. Retirees were only able to receive a fixed income stream, which meant they could not cover large unexpected expenditures.
“Similar products offered in other markets typically offer a choice of regular income stream, a lump sum, a line of credit, or a combination thereof,” the researchers note in their paper, Is there demand for reverse mortgages in China? Evidence from two online surveys.
“Furthermore, purchasers of the Happy Life Insurance reverse mortgage product are unable to choose the level of debt they would incur.”
The researchers surveyed senior homeowners and adult children in China about their interest in a more flexible reverse mortgage product design, taking care to explain fully key product features, while addressing concerns about the risks associated with reverse mortgages.
They found that of Chinese homeowners aged between 45 and 69, nearly 90% would be interested in a product that allowed them to control the income stream. A complementary survey of adult children aged 20 to 49 found 84% of respondents would recommend such a product to their parents.
'Some older homeowners rejected the reverse mortgage because they wanted to leave their property to children or grandchildren, while very few of the adult children were concerned about this'KATJA HANEWALD and CO-AUTHORS
Contrary to popular beliefs, these adult children were not worried that reverse mortgages would reduce their inheritance. Both parents and children said reverse mortgage payments would be a viable way to fund a more comfortable retirement, paying for things such as better medical treatment and aged care services.
The research has a number of implications for the Australian market, say the co-authors. Providers and regulators should not assume consumers are aware of or understand a product’s features, and providers should ensure potential purchasers know how a particular reverse mortgage works.
Also, families should be encouraged to discuss what a reverse mortgage would mean for the parents’ retirement and their children’s inheritance.
“Some older homeowners rejected the reverse mortgage because they wanted to leave their property to children or grandchildren, while very few of the adult children were concerned about this,” say the report’s authors.
“At the same time, a number of the adult children thought their parents would not be interested, while rates of interest were high in the older sample.”
A 2018 review by the Australian Securities and Investments Commission (ASIC) found that reverse mortgages could help retirees with their immediate financial goals but said borrowers should be helped to make informed choices about products. It also noted a lack of competition in the market.
Australia’s Council on the Ageing has raised concerns that many people don’t understand that as the years go by compounding interest significantly reduces the equity in a home.
In 2018, Commonwealth, Bankwest and Macquarie banks exited the market purportedly due to capital adequacy requirements, longevity risk, limited access to wholesale funding and low interest rates.
UNSW Business School is now funding a two-year research project with industry partner Household Capital, to investigate the impact of behavioural and other issues on the uptake of reverse mortgages in Australia.