About Equity Release

Equity Release is the process of accessing some of the equity (accumulated value) in your home, and turning it a more readily usable form – money.

Australian Seniors have the potential to release home equity in 3 ways:

The Equity Release market in Australia is dominated by Reverse Mortgages, which are widely available. Home equity release by way of Home Reversion Schemes is also popular in certain locations. Shared Appreciation Mortgages (SAMs) are the newest entrant into the Australian Equity Release Market, and at this point in time, there are no SAMs that have been designed specifically for the Seniors market. However, the market is expecting the launch of a "SAM-for-Seniors" within the next 6 (perhaps 12) months.

Reverse Mortgages

When releasing home equity with a Reverse Mortgage, the Consumer (borrower) offers their home as security for a loan, which is made available in the form of a lump sum payment, a series of instalment payments or a “reserve-of-funds” (or combinations of these 3 options).

The borrower retains ownership (title) to their home, and in return for the funding provided by the lender, the borrower grants the lender a mortgage.

Reverse Mortgages are designed to free the borrower of the obligation to service the loan (ie. make regular repayments), although many borrowers can, and do, service their loans, either partly or in full.

Since a loan secured by a Reverse Mortgage is typically not serviced, the loan balance will increase over time, as interest and fees are “rolled-up” (ie. capitalised), and the loan becomes repayable either when the borrower decides to repay the loan or dies (or in the case of some products, when the borrower leaves their home permanently).

Reverse Mortgage loans are usually modest in size, since the amount that a Reverse Mortgage lender will be prepared to lend is determined by the age of the (youngest, if more then one) borrower and the value of the home in question. A 60 year old borrower can expect be offered in the order of 15% of the value of their home (referred to as a Loan to Value Ratio - LVR) and borrowers aged 90 and over can expect in the order of 45% - 50% of the value of their home as a maximum.

Home Reversion Schemes

There are 2 styles of Home Reversion Schemes – one that calls for a “sale and lease” arrangement to be set in place, and the other that calls for a “sale and mortgage” structure.

In broad terms, a Home Reversion Scheme will require the Consumer to sell part or all of their home, at a discount to the full (market) value of the home. The discount agreed between the Consumer and the provider is typically within a range of between 35% and 60%.

Currently, there is only one provider offering a Home Reversionary Scheme product in Australia – namely Homesafe Solutions Pty Limited, and their offering is a “sale and mortgage” style of Home Reversion Scheme.

The key distinction between a Home Reversion Scheme and other Equity Release products is that the funds that the provider advances to the Consumer, does not attract any interest – since a Home Reversion Scheme is not a loan, it is essentially a real estate transaction.

By accessing home equity via a “sale and mortgage” style Home Reversion Scheme, the Consumer is “forward selling” an agreed portion of the value of their home.

In other words, in exchange for the Consumer receiving an agreed cash lump sum, he/she/they will enter into an agreement to sell a certain percentage of their home, to be completed at a time in the future. Importantly, part of the agreement with the home reversion scheme provider is to allow the Consumer to retain ownership and occupation of their home, until the sale contract is finally settled.

The Homesafe Solutions Home Reversion Scheme product is distributed by Bendigo Bank and is currently only available in certain areas within the Sydney and Melbourne metropolitan areas.

Shared Appreciation Mortgages

Shared Appreciation Mortgages (SAMs) have a much broader application than both Reverse Mortgages and Home Reversion Schemes.

Whereas Reverse Mortgages and Home Reversion Schemes are both “aged based” Equity Release products, SAMs can be used by consumers significantly younger than 60 years of age.

Promoted and marketed as a possible solution for “first home buyers”, “family up-graders”, as well as Seniors – it’s the ability of SAMs to be fused (linked) with other mortgage products that makes then so versatile. However, it’s the version of a SAM relevant to Seniors that we at Fortus specialise in.

Simply stated, a Consumer who takes out a SAM agrees to share an agreed percentage of the growth in the value of their home, in return for receiving a lump sum of cash now.

As opposed to a Reverse Mortgage where you are borrowing money (and capitalising interest), or a Home Reversion Scheme where you are “forward selling” a portion of your home at a discount – with a SAM you are giving up an agreed percentage of the possible increase in the value of your home, in return for the advance of a lump sum of money.

Currently there is no “stand alone” SAM (ie. a SAM-for-Seniors) that offers an alternative to Reverse Mortgages or Home Reversion Schemes, however the market expects that by the end of 2007, it is likely that at least one such product will be available in Australia.