Title: Innovations in Housing Finance Reverse Mortgages and More
1Innovations in Housing FinanceReverse Mortgages
and More
2Agenda
- Historical context of Australian mortgage market
- Equity release market
- Reverse Mortgages
- Home Reversion Schemes
- Shared Appreciation Mortgages
3Historical context of Australian mortgage market
- Historically a commodity product offering
- Banking deregulation did little to change this
until 1997 - Introduction of non-conforming / sub-prime
markets altered the traditional landscape of the
market - Mainstream lenders identified Low Doc as an
sector that they could service which now forms
approximately 20 of total market
4Equity Release Products
- Early development stages of product life
- Initially driven by shortfall in the incomes of
seniors - Expectations that products will become mainstream
but in the context of the overall mortgage
market - Market will develop beyond the funding
requirements of the current seniors generation
5Reverse Mortgages
- Product specifications
- Amount based on borrower age / property valuation
- No regular repayments (bullet repayment)
- A number of draw down and interest rate options
- No negative equity guarantee
- Targeted at seniors market
- Growing market acceptance and understanding of
the product - Borrower risks
- Inheritance passed on to beneficiaries
- Capacity for provider to fulfil obligations for
annuity payments - Potential to lose flexibility in age care funding
6Reverse Mortgages
- Funder risks
- No negative equity guarantee
- Cash flow
- Long term funding capability
- Specific issues
- No negative equity guarantee
- Cash flow
- Long term appetite for securitisation
- Repayment speeds
- Future reputation impact
7Home Reversion Schemes
- Product targeted at seniors market
- Product specifications
- A percentage of the security property is sold to
a provider at a discount rate in return for
receiving a loan amount (lump sum or annuity) and
life tenancy - No regular repayments (bullet repayment)
- As an example 50 of value is sold with an amount
between 35 and 60 received by the borrower - Sale mortgage / sale lease back
- Borrower risks
- Availability of product dependent upon geographic
location - Capacity for provider to fulfil obligations for
annuity payments - Incur 100 of maintenance cost while holding less
than 100 of security property value - Property appreciation shared with provider that
could be beyond a debt capital cost
8Home Reversion Schemes
- Reluctance to offer product by originators driven
by product complexity, the UK experience and the
failure of a local product provider
9Shared Appreciation Mortgages
- Broader market appeal first home owner
application - Recent product release Rismark / Adelaide Bank,
Greenway Capital - Product also being offered by some government
agencies to assist low income earners into home
ownership - Product specifications
- Introduces a second equity holder via an
agreement between the home owner and the provider
to share in a percentage in the appreciating
value of the property - Improves affordability by reducing the debt
component required to fund a property - Repayment (usually) involves some level of
leverage - Variable structures that share the risks /
returns between the parties - As with equity, no ongoing repayments. Private
providers apply a term with a bullet repayment
due
10Shared Appreciation Mortgages
- Borrower risks
- Availability of product dependent upon geographic
location - Loan term may drive repayment that is
inconsistent with the time frame of the owner - Product may not improve the owners position in
the market - Leveraged repayment amount reduces product
attractiveness - Funder risks
- Security structure likely to hold 2nd mortgage
position behind any debt component - True characteristics of equity does not provide
cash flow for operations - Access to capital that has a long term maturity
profile - Reputation impacts from leverage structure
11Shared Appreciation Mortgages
- Specific issues
- Market acceptance of a product that has a high
level of complexity - Limitations on product offering
- Product structure being watered down by similar
offering from government agencies - Product attractiveness / funding attractiveness
matrix - Share on improvements how is this commercially
determined - Reputation term repayment, leverage,
limitations
12In Summary
- Equity release market will grow but likely to
remain the territory of niche providers in the
short to medium term - Products dont suit the commodity type processes
employed by the majors - Potential reputation risks imbedded in these
products is a barrier - Education of the market and the level of
understanding by the market will drive take-up - Expectation that capital markets will respond to
the needs of the retail market - Develop the product, develop capital market
funding - Debt market is looking for yield and different
asset classes