New product to replace ‘flawed’ reverse mortgages

‘Fractional equity release’ will allow retirees to drawdown on their property incrementally by selling off units of equity to investors, who in turn can purchase shares of the property via the existing Domacom Fund.

The company is in the final stages of finalising a product disclosure statement with ASIC and hopes to launch the fractional equity release product through the third-party channel later in the year.

“The fractional equity release will actually be a product that mortgage brokers can sell,” Domacom head of marketing Warren Gibson told Mortgage Business.

“While it is a prescribed interest around licensing, those things are solvable,” Mr Gibson said, adding that that an accreditation program is being developed for brokers and PI insurance will also be provided.

“We have already broached this in the mortgage broker space and they love it,” he said.

“Most of the reverse mortgages have been sold by mortgage brokers, but they are not really being sold much any more, so this replaces that – it gives them a new product.”

The growth of reverse mortgages has moderated significantly since the GFC when global funding froze, forcing many specialist lenders out of the market.

Last week’s Deloitte Reverse Mortgage Survey 2014 found that the number of equity release loans had decreased over the year, from 42,455 in December 2012 to 41,435 in December 2013.

Mr Gibson said the new fractional equity release product will replace the reverse mortgage, a product that is essentially ‘flawed’ in terms of its funding model.

“They borrow two-year money from the global money market and lend it to people for 20 years,” he said.

“So straightaway there is a mismatch of time horizons and there is a debt.”

In addition, without regular repayments the interest rate on a reverse mortgage compounds over time.

“We started talking to people with reverse mortgages and realised that those who set up a reverse mortgage four or five years ago set it up at 7.75 per cent interest,” Mr Gibson said.

“After four or five years their debt had increased by 50 per cent and the interest rate is now 9.2 per cent.

“In another four years the debt will have doubled and the interest rate will be well into the double digits; and these are people who don’t work.

“Meanwhile, their children have jobs and have bought homes and are paying 6 per cent.

“There is something wrong about that.”

Mr Gibson said Domacom’s new product will protect the property owner with a contract of permanent residency, while also protecting the investor via a mortgage instrument held by Perpetual.

Investors will be able to purchase shares in residential property via their SMSF, and potentially via their industry super funds, Mr Gibson said.

“We think that this is the next evolutionary stage of equity release and the reverse mortgage model is simply not sustainable,” he said.

“It is totally reliant on global money markets, whereas the fractional equity release is reliant on people contributing to super – which is embedded in law.”