Lender launches commission-free retirement loan

A new lender has entered the Australian retirement industry with a loan product aimed at helping retirees live more comfortably at home.

Household Capital, a retirement lender founded in 2016, has launched a loan product that allows retirees to access additional retirement funds by using a low-interest loan to transfer a portion of the value of their home in their retirement fund or investment account.

The announcement from the specialist lender says that borrowers have “a lifetime occupancy guarantee on their home” and, under 2012 regulatory changes, they “never have to pay back more than the value of their home”.

Joshua Funder, Managing Director and Managing Director of Household Capital, said: “The Household Capital loan is suitable for people nearing retirement who have a low retirement balance that needs a boost.

“It also works for those in mid-retirement who may have exhausted their retirement pension and need more income, as well as for retirees who may need funding to transition into assisted care.”

The transfer of home equity between generations can also help fund deposits for first-time home buyers.

Household Capital’s $100 million wholesale credit facility was provided by ME Bank, which also made a strategic equity investment in the specialty lender.

Other equity investors include Jim Miller, Macquarie Group director and current vice-chairman of JP Morgan, Nick Sherry, former federal superannuation minister, and Allan Myers, senior counsel.

Mr Sherry, who is also chairman of Household Capital, said governments around the world were grappling with revenue and spending pressures as their working-age population shrinks, while healthcare costs , elderly care and pensions are increasing.

According to the specialty lender, the average pension balance for a retiree, which is around $200,000, lasts 10 to 15 years.

At the same time, there is more than $900 billion in untapped equity held by retirees, with about 80% of retirees owning their own homes, the lender noted. The median home value in retirement is around $700,000.

The launch comes after Commonwealth Bank and its subsidiary Bankwest, Macquarie Bank and Westpac exited the reverse mortgage market over the past two years, leaving Heartland Seniors Finance as the largest provider with a 20% market share.

No commissions paid to brokers

While lenders like Heartland Seniors Finance rely on the broker channel, which accounts for 70% of originations, Household Capital operates on a fee-for-service model.

“Household Capital charges a set-up fee to cover the cost of setting up the loan and interest is charged on the capital taken from a person’s home. The final amount is paid when the person leaves the house and the house is sold,” the lender’s announcement explains.

“Household Capital does not pay commissions or trailing commissions to brokers and there are no “break fees” or hidden fees. Instead, Household Capital financial services are provided with pension funds or financial advisors to meet the specific needs of each retiree.

The lender will charge an interest rate of 5.9% per annum, which it says is “significantly lower than those previously charged by banks”.

A review of the $2.5 billion reverse mortgage market by the Australian Securities and Investments Commission last year, which drew data from 17,000 reverse mortgages, found that reverse mortgages have tend to have interest rates about 2% higher than standard home loans. He also noted that because reverse mortgage customers aren’t required to make repayments until they sell the property or die, interest accrues over time, making the bill default on a larger reverse mortgage than sometimes expected.

“The sale of the family home can lead to the loss of old-age pension entitlement and the cost of buying and moving to a new house can lead to a significant loss of capital,” said former pensions minister Mr. Sherry.

“The substantial savings held by Australians in their family homes is a largely untapped resource that can be better used to help retirees live well at home.”

[Related: P&I switch could worsen senior debt stress]

Lender launches commission-free retirement loan

mortgage

Last update: March 07, 2019

Posted: March 08, 2019

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Priscilla C. Carnegie