Archive for November 22nd, 2010

Reverse mortgage industry set for shake up

22nd November
2010
written by PaulCastran

The reverse mortgage industry, worth of $3 billion, is set for a major overhaul with new laws and tougher disclosure rules expected in the new year.

A reverse mortgage is money lent against the value of the property and no repayments are made as the interest is added to the total debt. The lender receives its money and interest back when the property is sold. Given the nature of these loans, lenders generally don’t offer these loans to customers under the of 60.

The shake up here is that the Australian Federal Government plans to ban contracts which allow negative equity to build up on a reverse mortgage, and will also beef up information disclosure requirements to ensure people fully understand what they are getting into.

It appears that these tough new regulations may increase the rate at which lending institutions are already existing this type of loan. Earlier this year, several major reverse mortgage lenders have withdrawn this offering, and the bank regulator has also warned lenders about the risks involved.

The Australian Prudential Regulation Authority informed financial institutions they must ensure they hold greater levels of capital, compared with traditional mortgages, to cover any potential defaults.
The requirements make these loans less profitable. From almost a standing start five years ago, the growth of reverse mortgages has been up to 77 per cent a year but has recently slowed to just 9 per cent. However, they remain popular with people who want to access the money without selling their homes.

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