Reverse mortgages boom

The popularity of reverse mortgages is continuing to grow strongly, according to a new study by Trowbridge Deloitte.

The size of balances grew by 67% in the 12 months to June, to $1.81 billion. In the six months to June the number of loans grew by 13% to 31,544.

Reverse mortgages enable cash-strapped home owners to draw on the equity in their homes. They don’t make regular payments to the lender, but pay back the loan when the home is sold.

The interest rate is higher than a regular home loan and consumer groups are concerned that elderly home owners will sign over their homes without understanding their obligations and the risk. The average loan size is $52,000 and the average age of borrowers in 73.

Consumer advocacy group Choice recently claimed that lenders were encouraging borrowers to take the maximum loan amount. The industry has fought back with a “no negative equity” guarantee so that borrowers never owe more than the house is worth.

Interestingly, the Trowbridge Deloitte report says that 10% of borrowers are repaying their loan each year, suggesting that they are a temporary solution for many borrowers. And the study found that only 15% to 20% are getting the money paid in instalments and few re-invest the money.

More likely, the borrowers are using the money to fund their lifestyle.