A retirement fund is breaking into the home equity market and plans to launch the country’s first home reversion scheme in February.
In the planning for the past five years, the scheme works on an agreement to sell Lifetime Home – part of the wider Lifetime Retirement Income group – a portion of your house and get the money paid back in instalments over 10 years.
The owner continues to live in the home.
Founder and managing director Ralph Stewart, who previously headed AXA Insurance then ACC, said it was not like a reverse mortgage which paid out a lump sum at the start of the term and accumulated interest, which was then repaid when the homeowner sold up.
“We supplement homeowners’ retirement income, every ‘Super Tuesday’, every fortnight with a small amount of money, that adds up to an amount every year that we then exchange for equity in their home. We do that for 10 years from age 70.
“So for a million dollar house, we pay the homeowner around $23,000 a year and at the end of the 10-year period, we would own 35 percent of the home and they will own 65.”
‘There are slightly more risks [than a reverse mortgage] because you’re actually handing over ownership of part of your property. You’ve got the lion’s share and so that does limit the risk, but what happens if you want to do something to the property?’ – Massey University Associate Professor Claire Matthews
He said the difference in this model to a reverse mortgage was certainty about total overall costs.
“The reverse mortgage model is based on debt – the homeowner borrows the money and defers the repayment of the debt until they sell the house. It’s a good model but it means that the homeowner has to effectively suffer a variable interest rate – the amount of money they pay back to the bank when they sell their house is unknown at the beginning.
“We’ve identified that satisfaction, comfort and a better retirement life is to some extent linked to certainty in retirement, particularly about financial affairs. So we’re trying to create a new model that allows the homeowner to have the benefit of releasing equity from their home, while being certain about how much of their home they own.”
When the homeowner sold the house they would essentially “buy-out” Lifetime Home – which would benefit from any capital gains.
Ongoing costs such as insurance, rates and upkeep of the home would lie solely with the original homeowner.
“It’s the homeowner’s responsibility to maintain insurance and we ask that they confirm that to us each year and we’re noted on the insurance policy as having an interest in the house. When we first enter into the agreement, we review the house and we consider fair wear and tear and if at the end of the 10-year period we’ve observed a fair wear and tear outcome there are no adjustments or changes.
“If they’ve decided to put a spa pool in the lounge, we might just want to have a bit of a discussion.”
Massey University Associate Professor Claire Matthews, who specialises in retail banking and financial literacy, said that the shared ownership model was where things became complex.
“There are slightly more risks [than a reverse mortgage] because you’re actually handing over ownership of part of your property. You’ve got the lion’s share and so that does limit the risk, but what happens if you want to do something to the property? I think it would very much come down to the contract.
“Because people like to have their own home, because it gives you that independence, it’s yours and you can do what you like with it and this is restricting it. So I’m not saying it’s bad, you just need to go in with your eyes wide open with really good legal advice to make sure that you fully understand.”
Stewart agreed and said the comprehension and financial literacy aspect was a huge part of what the organisation had been grappling with.
“The onboarding process could take months, if not years. So there are three critical parties – the homeowner, their advisors, and their family. So to enter into this agreement with us, you have to have legal advice, we encourage you to have financial advice, we encourage you to talk to family. We won’t let them take this out unless they do those things.”
He said there was a place for reverse mortgages but for many people struggling with the cost of living or wanting to supplement their Superannuation, a big lump sum was not suitable.
“We do lots of public seminars and our core business is providing retirement income so people come up to us and say ‘I’ve got no money’. Reverse mortgages for lump sums have a place and we want to coexist beside that, but our business is retirement income so we talk to people about that and now it gives us a chance to talk to those people who don’t have any money, but have assets.”
The company’s primary business is its retirement fund, which would fund the home equity scheme.
The plan is to run a pilot of 80 homes for 12 months, which will cost about $10 million.
“That’ll give us a chance to really test the model and make sure it’s okay. All things going well, we should be able to do 80 houses within 12 months, and potentially 300 houses within a couple of years. One thousand houses within five years would be a good outcome.”
Because the scheme is equity, not debt, it is not explicitly covered by a regulator. However, the Reserve Bank, Financial Markets Authority and the Minister of Business Innovation and Employment have been kept in the loop.
“There are no obvious regulations for it. So we’ve approached all the regulators on many occasions to explain what we’re doing and they’ve been helpful and thought it through and have called out things that they don’t like or understand. So we’ve tried to prepare ourselves for the day when regulation occurs, whether it does or not.”
Matthews said she would like to see regulation sooner rather than later.
“I definitely think that the regulators should be keeping an eye on it and should be looking to move to capture it within the regulatory framework. While the proposed provider and the people associated with it are reputable, if this took off and proved to be really successful, who else might come to the market to do it?
“And so you need to be proactive about providing the regulatory environment before you have problems, rather than waiting until problems arise.”
The Retirement Commissioner’s review of Retirement Income Policies last year recommended better information on equity release products.
The report noted equity release schemes were designed for people who wished to stay living in their own home, but options were limited.
“[There are] no home reversion schemes in place and only two banks offering reverse mortgages. These products are complex and may not be well understood.
“Research should be undertaken to understand whether these products provide value for money – the interest rates on reverse mortgages are higher than on other mortgages. While the products provide an obvious solution for those who find themselves ‘asset rich but cash poor’, they are often described as a product of last resort, which may deter people from using them.
“There is an information gap that it may be useful to fill so that retirees have good comparative information available.”
Buy-back scare lingers
Home reversion schemes, also referred to as buy-back schemes, were clamped down on in 2003 with the passing of the Credit Contracts and Consumer Finance Act.
Housing buy-back schemes resulted in homeowners losing their homes through the actions of unscrupulous creditors.
In 2003 the government intervened by placing eight companies involved in housing buy-back schemes under statutory management.
The act was passed with a particular focus on buy-backs including tough penalties and new disclosure requirements.
The key difference with the buy-back schemes targeted in this case was consumers had transferred the title of their property to the creditor, which was not something Lifetime Home wanted.