Housing Affordability: The Use And Misuse Of Reverse Mortgages

The largest single asset for many older Australian households is their primary place of residence, usually in the form of a detached house or a medium to high density unit. This cohort consists primarily of retirees aged 55 years and over who have permanently left the full-time workforce with limited means of earning additional household income, but who also have a lack of prior financial planning assistance and often no access to superannuation funds. At the same time there has been an increase in essential living expenses such as medical, food, transport and the introduction of a Goods and Services Tax (GST). These changes were generally unforeseen and have severely challenged the ability of Australians or seniors to retain a reasonable level of housing in retirement, as the combination of restricted household income and increased living costs has placed substantial pressure on the household budget (Weiner, 2003). This paper investigates the use of reverse mortgages in Australia as a means of providing a viable long-term solution for older households to meet unforeseen expenses during retirement. The emphasis is placed on the potential for reverse mortgages to be misunderstood by retirees over the long-term, as accessing home equity in this manner is an irreversible decision when there is no financial capacity to repay the loan. It examines the long-term implications for older households, especially those who are unfamiliar with banking practices, complex mortgage documents and all costs associated with this type of loan.