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17-04-2006

Reverse mortgage traps uncovered

By Jenny Dillon 

ALARMING traps have been found in reverse mortgage contracts, putting the elderly at risk of being forced to sell their homes or being slugged with higher interest rates.

A study by the Australian Consumers Association of 19 lenders has found contracts come with default clauses which, for even a minor breach, can result in a call for the immediate repayment of the loan, which may in turn force the borrower to sell up.

It also found the "no negative equity guarantee", where the lender covers any shortfall if the loan exceeds the proceeds from the sale of a home, often gave virtually no protection at all.

The body of reverse mortgage lenders, Sequal, said the results were "theoretical", but the ACA said contracts had "potential to cause harm".

The lenders surveyed included the Commonwealth Bank, Macquarie Mortgages, BankWest, Mariner Retirement Solutions, RESI Mortgages, ABN AMRO, Australian Seniors Finance, Collins Securities and Vision Equity Living.

The ACA said the traps had the potential to place the elderly in financial danger when they are frail and vulnerable.

It urged all governments to introduce uniform reverse mortgage laws to force the industry to standarise its contracts.

Reverse mortgages, which have gained in popularity in recent years, allow people over the age of 60 to borrow against the value of their home to supplement their retirement incomes

Your basic choice is whether to buy term or cash value. Term is plain vanilla; it pays off only when you die. Whole life gives you more but charges you more. It basically offers term life plus a savings account; so you get a payoff after you've paid the policy premiums for a certain number of years.

People aged 60 can borrow up to 15 per cent of the value of their homes, those more than 80 can get about 35 per cent. The loan, accumulated interest (variable rates range between 7.5 per cent and 8.5 per cent) and fees are repaid when the house is sold or borrowers die.

Property titles remain in the borrowers' names and they are responsible for rates, repairs and maintenance. It is here where borrowers can find themselves in default, for example:

• REPAIRS not done after the lender has demanded them;

• RENOVATIONS made without the lender's permission. "Renovations such as a wheelchair elevator or ramps may not be allowed because they may have a negative impact on the property's value," said the ACA;

• RATES, taxes not paid on time;

• PAPERWORK not maintained or done correctly, such as failing to give an annual statement declaring you still live in the home.

Once the borrower was in default, the lender could demand the immediate repayment of the loan and charge a penalty interest rate of 2 to 3 per cent more until it is repaid.

The sudden demand for tens of thousands of dollars may force the borrowers to sell their home.

If the borrower has defaulted, many lenders will no longer honour the no negative equity guarantee.

Another problem came when the borrowers died, with the estate going into default if the loan was not repaid in three months.

However, it takes at least three and a half months for a home to be sold: about a month for papers to be organised through a solicitor, a month for the real estate agent's marketing campaign, then the six-week property settlement.

Source: NEWS.com.au

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