ASB says it decided to become the only major New Zealand bank to offer reverse equity mortgages because they're something some customers "need."
Catherine McGrath, ASB's chief executive of customers, markets and products, told interest.co.nz in a Double Shot interview that the reverse equity mortgage discussion was a hard one to have to in New Zealand because we're so fond of our homes.
"So the thought of ever doing anything to take less ownership of the home feels like a difficult thing to do," said McGrath, who returned to ASB in New Zealand from a role as transaction banking director at Lloyds TSB in London earlier this year.
"But the reality is there’s a group of New Zealanders who don’t have enough savings to help them in their retirement and what they were looking for was an option from a brand that they trusted to say 'let me stay in my own home, let me still own my own home, but let me access some of the equity.' So that’s why we’ve done it because it’s something that some of our customers need," said McGrath.
ASB announced it would begin offering reverse equity mortgages in August. SBS Bank and Sentinel also offer reverse equity mortgages and Westpac used to, but pulled out of the market in August 2008. ASB says they are specifically suited to people older than 65 years of age, and enable asset rich but cash poor home owners to borrow money against part of the equity they have in their home.
Reverse equity mortgages have been controversial in the past, particularly among borrowers concerned about putting debt back into houses they had hoped to hand on to their heirs unencumbered. The Auckland District Law Society issued a paper on reverse equity mortgages in December 2007. It said unless the borrower was over 70 years of age and intending to borrow only a small proportion of their equity, they should be "very circumspect" about entering into such a mortgage.
University of Melbourne researchers also issued a paper in 2007 on reverse mortgages in Australia, where the market is more developed than New Zealand.
There have been predictions that reverse equity mortgages will become more popular as an ageing population sitting on big equity gains from the property boom look to free up cash for extended retirements. However, conerns have been raised that lengthening retirements and survivability, and the impact of compounding interest, could see equity eroded before any inheritance can be passed on to a home owner's children. Falling house prices also increase the risks around reverse equity mortgages, given any equity in a house is being squeezed from both ends.
McGrath said ASB has designed its product offerings to combat inheritance fears.
"If you look at it and say 'I want to make sure that there’s always 50% of the value of my home to pass on to my children,' we’ve built something into the product that lets customers do that," McGrath said.
"So feedback has been really positive. Customers really like the process that we take them through to make sure that they’re comfortable with the decision that they’re making."
"We ask them to bring family along, they have to get independent legal advice, and those are really important parts of making sure that customers go into the decision fully informed and very comfortable about the benefits and risks."
Asked how strong the take up of reverse equity mortgages has been McGrath said she couldn't talk numbers because that was commercially sensitive.
"But we’re very happy with the way it’s going and the specialist people that we’ve got involved working with this product are all keeping themselves well and truly occupied."
Interest rates on ASB's HomePlus reverse mortgages starts at 7.75%, including the cost of funding the loans, the risk factor, the guarantees provided and the length of time the money would be tied up. ASB's regular variable rate is currently 6.25%. See all bank mortgage rates here.
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