Heartland Bank eyes restructure to help enable ongoing secured funding for its fast growing Australian reverse mortgages business

Heartland Bank's proposed corporate restructure, announced on Wednesday, is primarily about allowing its Australian reverse mortgage business to continue growing with the help of  secured funding.

Heartland Chief Financial Officer David Mackrell told interest.co.nz the primary reason for the restructure is to remove growth constraints resulting from Reserve Bank regulations.

And that will provide us greater flexibility to grow both our business in Australia, and potentially opportunities in New Zealand," Mackrell says.

"One of the key aspects is our business in Australia, primarily our reverse mortgage business, is a business that's growing very strongly. It's a business that we fund through a secured facility in Australia. As it grows that securitisation level overall starts to get to a level which we can see in the medium [term] future, will start to come up against the constraints that the Reserve Bank places on us in terms of secured funding," says Mackrell.

"The other piece to it is to open up the potential for an ASX listing. One of the things that constrains us from that at the moment is that our holding company is the bank and has the word 'bank' in it which is appropriate. But if we tried to have an exempt listing in Australia, a dual listing on the ASX, that is problematic because that would require the Australian Prudential Regulation Authority's [APRA's] approval. And as we're not a bank in Australia, that would be a problem." 

"So it [the restructure] opens up that opportunity as well," Mackrell says. 

The restructure proposes Heartland Bank Ltd becoming a wholly owned subsidiary of a new NZX listed parent company, called Heartland Group Holdings Ltd, which will seek a foreign exempt listing on the ASX.

CBA loan

Heartland has been experiencing strong growth in the reverse mortgage market. It entered the reverse mortgage market on both sides of the Tasman in 2014 after buying Sentinel in New Zealand and the Australian Seniors Finance business for NZ$87 million from the Quadrant Private Equity controlled Seniors Money International. Heartland had more than NZ$1 billion worth of reverse mortgages, with $430 million in NZ and $598 million in Australia, as of December 31.

Heartland Seniors Finance accounted for 69.9% of total Australian reverse mortgage market growth in the 12 months to December 31, growing its market share to 17.7% at December 31 from 14.1% a year earlier. As reported by interest.co.nz earlier this year, Heartland is the biggest originator of new reverse mortgages in Australia where it operates free of APRA oversight. Heartland Seniors Finance is a finance company that's licensed by the Australian Securities and Investments Commission (ASIC).

Heartland has an Australian bank facility provided by ASB's parent Commonwealth Bank of Australia (CBA). According to Heartland's interim report, as of December 31 last year, A$495 million of the A$600 million facility was drawn. The CBA bank facility is secured over the shares in Australian Seniors Finance Pty Limited and the assets of the Australian Seniors Finance group. The CBA loan facility matures on September 30, 2019. 

Asked whether Heartland was looking to renew the CBA facility beyond 2019, Mackrell says the bank plans for these events and makes sure it's "ahead of the game in that regard."

Mackrell says the Reserve Bank imposed limit on secured funding isn't public information and has "some commercial sensitivity." However, it's likely to be disclosed within the information issued to shareholders prior to September's annual meeting, where they'll vote on the restructuring proposal. Mackrell says Heartland currently has about 18% of its funding from secured funding.

As of December 31, Heartland had $4.3 billion of total assets and $124.236 million of securitised finance receivables. It had $115.059 million of securitised borrowings. The bank had $3.63 billion worth of borrowings of which $2.7 billion were deposits.

Separately Mackrell says Heartland also has constraints around how much business it can have outside New Zealand, which is allowed to be one-third of the bank's business. Whilst Heartland's still "miles away" from that being a constraint, Mackrell says the rule might one day be problematic.

After the restructure Heartland will remain a New Zealand registered bank, with the key regulator of its Australian reverse mortgage business remaining ASIC.

Mackrell says there are no tax benefits for Heartland in the restructure. The restructure would give greater flexibility for future growth opportunities, especially in Australia, potentially through the likes of unsecured personal loans via peer-to-peer lender Harmoney which operates in Australia, and lending to small and medium sized businesses.

"This [restructure] should be seen as a positive," Mackrell says. "We see opportunities to grow and what we're doing is restructuring ourselves to ensure that we are able to have the flexibility to take advantage of those, and to access - if required - a deeper capital market in Australia."

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47 Comments

Going knee deep in equity release lending at the very top of the property bubble and right at the time when the Aussie property bubble is starting to pop. Gee what could go wrong

Problematic for the borrower perhaps; not for Heartland.

I’m not so sure. They get no repayment, they take residual equity value risk in a way that no other lender does. They are more exposed to declining equity than any other lender would be. I suppose it depends on the size of the equity buffer. I can’t see equity release appealing to the well off, it may appeal to the struggling middle who can’t or won’t downsize.

I think the amount that they lend is never going to be greater than 50% of the value of the property and likely to be much less, so ultimately they have the option to "foreclose", but I agree with what you're saying in that this type of lending is targeted towards "asset rich, cash poor." I think that the particular segment is much more common than many would realize.

If property prices fall significantly, some retirees who have reverse mortgages could go from being "asset rich, cash poor" to "poor" (i.e asset poor, cash poor), or worse "destitute" if the property price fall is very large.

In the worst case scenario, the retiree is foreclosed by the bank as the equity buffer is too small or non-existent. The bank takes the property and sells it in the market.

The retiree gets virtually no leftover proceeds due to the reduced sale price of the property to repay the debt, and is forced to rent a home (it may end up being a room as the retirement income is insufficient to rent a whole house). Alternatively they could go live with family members. If the retiree is using the reverse mortgage loan proceeds to maintain living standards currently, then the retiree is likely to be much worse off in terms of standard of living.

This could be the one financial decision that ruins all the other good financial decisions that the retiree has made over their entire lifetime - that would be awful for them and could potentially put them in poor mental health as well as poor financial health. Borrowing for an asset that is depreciating in value where the debt is continue to compound is such a bad idea - and ultimately leads to financial ruin.

A mathematical example:
Age 85
House value $700,000
Reverse mortgage 40% of house value - $280,000
Interest rate 7.82%

5 years later - at age 90
Reverse mortgage balance $407,884 (as interest has been added on to the loan balance)
Equity value if house price remain same - $292,000 (LVR of 58%)
Equity value if house price fall 10% - $222,000 (LVR of 65%)
Equity value if house price fall 20% - $152,000 (LVR of 73%)
Equity value if house price fall 30% - $82,000 (LVR of 83%)
Equity value if house price fall 40% - $12,000 (LVR of 97%)
Equity value if house price fall 50% - negative equity

At what LVR level would the bank foreclose on the retiree?
If the 90 year old is still physically healthy, would they still have sufficient funds in retirement to maintain their standard of living in retirement? or would they have to rely on family members (if they have any willing to help out)

The calculator by Heartland, never assumes a fall in the property price.
https://www.seniorsfinance.co.nz/reverse-mortgage-calculator

Nicely explained CN. Your example only shows a single winner here: Heartland.

While the retiree or their nominated partner is still alive, they can live in the property for as long as they want to, regardless of equity. It pays to check the small print of a reverse mortgage provider though as there are/were differences.
Once the retirees chose to move out, then the left over equity may become an issue for them.
If both stay in the property till their death, then the left over equity may be disappointing for their heirs.
I would think that in some circumstances (no heirs for example) reverse mortgages can benefit retirees if part of an overall financial strategy that balances the potential risks and returns.

What did they do with the 280k?
Invest it and turn it into $1,000,000?
Enhance their few remaining years by completing their bucket list?
Spend it $80k a year on booze and hookers?
Waste it?
You assume they have none of it left and have used it unwisely

You raise an interesting point. What do retirees choose to do with the funds?

Retirees unable to rent on the pension income due to affordability.

https://www.stuff.co.nz/national/106063441/rise-in-homeless-older-genera...

If your 60 you can only borrow 15%
if your 85 you can borrow 40%.
Even with decining equity sounds good too me.

The idea of reverse mortgages sounds like a rather good idea. At least, until you read the fine print. The banks make quite a good return when providing a reverse mortgage. One has to look at the total transaction, in that quite a bit of the disappearing money can go via fees instead of just the interest rate. That said, I've not looked at the details for Heartlands reverse mortgages. Just remember looking through the details of some rather predatory reverse mortgages that were available in the US in the past.

It is a great market to get in, if you are somewhat callous and lacking in ethics. Your target audience is property rich/cash poor, which suggests a lack of financial acumen in general. They are elderly and may not be quite as sharp as they were in their prime. They are getting a bit desperate due to the cash poor position, so the concept of a reverse mortgage is appealing so as to not have to sell their main asset. Cue the financial jackals to start circling...

Completely agree. The jackals (banks) create the bubble and behave like predators when society's wealth is stored in housing.

Both the lenders in reverse mortgages and retirement village proprietors tend to have very harsh conditions very much to the severe determent of their "customers". At best, I tend to not be able to think "rip-off merchants".
It is essential that elderly plan to ensure that they are not overly capitalised in assets (home) and that they have sufficient investments to provide income to supplement superannuation beyond anticipated life expectancy to meet whatever the lifestyle they desire and can afford.
Planning - or at least considerable thought - for this needs to occur well before retirement.
This is likely to mean downsizing the family home to release capital and ensuring the home is of low maintenance (in plenty of time prior to this being essential to do).
This may seem obvious. However the current TV ad (I think Heartland) promoting reverse mortgages (the one "Mum is away on holiday") shows a home which has obviously been the family home, is far too large for one person (empty bedrooms, old with high heating costs?), and is high maintenance with weatherboard exterior and extensive grounds.
For "Mum" to hold what is appears to be the old family home is at an exceptionally high cost.

I actually cringe every time I see the ad; I think it is about targeting/selling (suckering) a bad apple idea to the adult child (i.e. Mum has no cash - but "hey, son don't fret this is a good idea"). Each time I yell out to the TV, "Hey son; dumbo, dumbo. Yes Mum should be enjoying retirement; but NO, NO - look at other options or kiss goodbye to any inheritance you dumbo! :)

Completely agree. The jackals (banks) create the bubble and behave like predators when society's wealth is stored in housing.

Did a quick google, and found this: https://www.consumer.org.nz/articles/reverse-mortgages

What I see is not so much as a reverse mortgage, but instead a high interest rate loan secured by the house that isn't repaid until death of the originator, from the proceeds of the house. The typical interest rate being up to 2% OVER the normal home loan floating rates is a bit high. As of Aug 2017 the typical interest rate was 7% for this loan. Ouch...

It’s a dog of a deal and surely only a thing you would do if you were desperate and downsizing wasn’t an option. There is bottom feeding lending

Agree yankiwi, I thought reverse mortgages we're something quite different, along the lines of a monthly payment for life.
All very predatory.

IMO no more predatory than buyig an apartmnt at a retirement village and losing 30% when you kick the bucket or move.

Agreed. Many of the retirement villages have very good returns on investment (for the retirement village owners).

I do feel for generation rent. Many are now completely reliant on mum and dad's house for wealth accumulation. I suspect a few sons and daughters will be spitting tacks when they find out that their inheritance has been reverse mortgaged.

So people would say too bad. There is no free lunches.

This would be something that should be done in consultation with family thats why Heartland have a 30 day cooling time.
What else can oldies asset rich but cash poor do?
My mum had a nice house and survived on her super but many others can;t and won't downsize.Move into a resthome and pay upwards of $1100 per week or buy an apartment at the same complex and lose plenty.

A bank gaming the regulator.
This will go well.

The other option could be raise equity to fund the business..........

The solution is simple. Buy that downsized house well before you need it and keep it as a rental. Buy a nice flat section close to supermarket and bus stop. When the time comes to cash in the family home, renovate the rental, new bathroom, kitchen, make it old person friendly. Internal access garage and mobility scooter access. Sell the big house and move to this one and hold out there for as long as possible.

“Let them eat cake”

It's a good plan for someone in their fifties, no? It also solves the 'giving away the inheritance to a finance company' problem. This should please the children.

It's a plan for our current world political/economic situation. I know a lot of you have big ideas about transforming society. I just don't think they are ever going to fly. It's Globalism now.

Yes, Globalism has only really benefited the top 20% in our society. But what's a small fish to do? Make the best of the situation I'm thinking. Ensure an inheritance for the kids. Don't fall out of the 20% by giving it all away to a finance company or rest home. Ensure your kids are in that 20%.

Globalism relieves one of all practical social responsibility - by this I mean that there is nothing much one can do to change things, strict rules of thinking and opinion apply so really just don't bother, you'll probably just get in a load of trouble for thinking outside of the box, who needs that?

It won't be for me as I am a Gen-X (early 40's) however I'll think about it in 10-15 years time.

We’ve given up on downsizing and will likely install a lift when stairs become an issue. The issue is the lack of diversity in quality housing. Just because you are old you don’t want to give up all day sun and quality building in a location you feel comfortable in. Apartments with that are very expensive per m2

Where would you suggest is a good place to downsize to?

Retirees of the frail and halt and un-abled kind need and seek single level easy-access, low-maintenance dwellings to downsize to - they don't want two-storied places with stairs to gain access and stairs to climb to the upper levels. Too much of the real-estate in auckland that you can see promo-photos of are two-storied. Nearly all the new-builds in auckland are two-storied, cookie-cutter, side-by-sides

Even many of the older 3-in-a-row 1970's single-level homes-units aren't too friendly access-wise.

Apartments in Remuera near the shops and reserves, and with 180-degree sea views. More importantly, close to all the clinics along Remuera Rd e.g. Eyes Institute, dentists and medical centres.

It will be a challenge. I own a two bedroom, brick and tile, internal access garage, flat section with its own driveway, in Te Atatu South. Perhaps this sort of place will attract a premium in the years to come.

Yes indeed, but then again you could likely look at setting up many 1-2 bedroom flats instead of a single larger bedroom house. Probably could still charge the same in rent by then.

What is really needed are retirement villages/communities that are purpose-built and affordable. The government would be wise to consider the inclusion of such in their Kiwibuild plans.

Kiwibuild looks like it will be in the wops which is fine for drivers. Older people want to be close to amenities.

and peak oil makes driving not an option....unless you can afford an EV.

So the BBs get cheap retirement housing as well as all their other benefits? I think/hope not.

Jeees Steven jealousy is a curse

Carterton, Wairarapa. http://www.jokellyandco.nz/listing/JK20014

I’ve been thinking about older folk going into apartments. Loneliness is a huge concern with older people, especially when on their own. Being locked up in an apartment, where people will probably be out most of the day would, in my opinion, be 10 times worse than being immobilised in a resthome! I live in Carterton and our next downsize will hopefully be to Ashmore Park. The company who has developed Ashmore Park have another development in Carterton plus I believe one in Cambridge and Christchurch. I have a friend who has just moved in to one and it’s beautiful, a winning formula IMO particularly as you own it outright and is not just licensed to occupy like most retirement villages.

I would recommend an area like Auckland (there are still many single level older properties designed with long term ownership & older needs), Hamilton, Dunedin (some areas of), etc places where they have good self contained suburbs that are flatter, still have many single level properties going, but most importantly close hospital & specialist access. In the North Island cases the proximity to Auckland hospitals is important (but that is across certain common medical issues where travelling to medical conferences or appointments becomes necessary) & flat development land. With the South Island the environmental hazard risks jump and hospital access is a huge problem for many cities, hence Dunedin while still affected by South Island risks the hospital access and housing affordability in good suburbs is ok (Christchurch used to also be a darling option but the natural hazard risk, hospital overloading inc large debts & water quality are both medical and financial risks that the person will have to bear as insurance will rarely cover related health issues or future damage related ones which have already killed people including family). However considering pricing & hazard risks the balance is tricky. Many state highways can easily be cut off in a disaster so relying on many places in those conditions & ease of emergency service access can be deadly. Hence much of NZ is not great when you expect standard causes of avoidable death to treatable conditions to be likely for you to watch out for.

But to find accessible properties in NZ, fat chance. Functionality of that sort is not fashionable. You need an especially custom build or large custom renovation, usually with a specialist builder who can handle the structural features required for accessibility on the chances of several medical conditions. Ripping out the walls, doors and floor to strengthen & widen elements, add drainage, accessible electric & plumbing may only be the start (especially with NZ housing stock). But for rolling the dice on extreme good health into your 80s you could probably skip medical issues and just go with lightweight handles, call buttons, wide doorways, rewiring, raised bed, rising chairs & raised toilet, i.e. things more superficial so long as the property is truly single level and can have ramp access easily added on (often around only 4 steps max as 1m rise usually needs a ramp of 12m). Note though for wheelchair or mobility difficulties you will need far more than just the superficial things and a cheap ramp. Bathrooms, kitchens, even bedrooms may need large redesign & walls shifted. Even a lot of the handles will need to be able to carry a large load on structural members. God forbid you have a serious fall that reduces mobility or need a hoist in the home. A few properties can have elevators added later but they are expensive to install and trust me expensive to maintain. Even places with wet area bathrooms are rare in NZ and the shub fashion is terrible & dangerous in later years. I do recommend showers with seating & even larger space for wider more horizontal bathing. When mobility concerns hit they become vital and as a bonus in younger years can fit a couple people, and make the more stretching elements easier.

Actually outside of the location & community issues the features in the following home are good for those in good health in golden years. https://www.realestate.co.nz/3290024https://www.trademe.co.nz/property/r... pity the only feature of the community is a hotel bar & gas pump. But yeah, doing the research around many developments practically no new homes are designed from the outset with the owners future in mind. The assumptions of being able to move into an affordable retirement village or having statistically improbable excellent health in your 80s-90s are still more common. Suggesting that many new popular builds & build designs (even that offered by popular franchises and developments) will have a reduction in safety & flexibility for the older population in certain areas, say the affordable areas.

Many seniors won't move because they won't own up to the fact that they are nearing the end.
My inlaw was carried into a rest home and carried out.He wouldn't sell his house'always hoping to move back home.Family started sqaubling about house even though he was still alive.Many problems resulted that are still going on today despite that fact that he died 18 months ago.

I read somewhere that the typical rest home occupancy is 18 months so many seem to resist the notion of their mortality. My own mother in law did and while making two years is looking very frail. She was forced to make the decision due to an inability to drive and living in a rural setting.

In the end whose Bloody house was it. Fair go!!

Interesting business this. Heartland and its ilk will always be seen as pretty low, as in a big business seemingly taking advantage of vulnerable people needing a cash injection. With its high interest rates and watertight contracts, it will be a easy target of the infirm, uneducated and unorganized (and vice-versa). Nevertheless, I wish it all the best in the lucky country!

Interesting wee story I had dealing with Heartland. We had vehicle finance through Marac, who were then bought out by Heartland.

We went to settle the outstanding balance of the loan (a little over $2k). Received an email with attached letter confirming that the security has been released on the vehicle and the account was paid in full. 2 days later the funds were back in my bank account.

So I made them aware of the error, they were very apologetic and asked me to transfer the funds back through again. This time I received 2 separate emails (one from the Customer Services Manager) confirming the account was paid in full (each with documents attached) 2 days later, the money was back in my bank account again. So I kept the money, and copies of all the emails.

Never look a gift horse in the mouth.

The boomers have voted for tax free real estate, replaced their would be grandchildren with Chinese immigration resulting in unaffordable housing and then gifted the kids one chance at getting a house to Heartland bank.