Relax. Home Equity Relase is all under control, no drama's.
Taking Stock 23 April 2015 - Chris Lee
THE Heartland Bank executive Andrew Ford is no greenhorn, having had at least a decade in executive positions at Heartland and its predecessor, Marac Finance.
At Marac he was one of several senior executives who was let down by the company’s weak leader Brian Jolliffe and by what proved to be a two-tier board of directors, with one tier proving to be inept as well as weak.
Ford was part of the transition team that converted Marac into a successful focused small bank, well led by Jeff Greenslade, and today Ford has some responsibility for Heartland’s move into Home Equity Release Loans, or reverse mortgages as these loans used to be called.
Ford was quoted at the weekend as having been moved by the heartfelt correspondence Heartland has received from senior citizens who have taken out these loans to enable them to maintain their living standards, and stay in their houses, rather than be short of cash and forced to move.
It is easy to believe that the borrowers would record their gratitude for the spending money they have accessed at a time when housing price rises are leading to higher-valued estates but also leading to higher rates and insurances for the home-owners.
One of the Sunday papers sought last week to emphasise the interest rate cost of these home equity loans, now more than 8%, and expressed concern that a borrower might end up ‘’eating his house’’.
Indeed if Heartland lent $100,000 to a 60-year-old taking a mortgage over an $800,000 house, when the owner was 84 years old the house would be fully mortgaged, if the interest rate averaged 9% and the house price rise over the 24 years was nil.
Quite rightly the Reserve Bank would be frightened for Heartland’s future if it made such a loan, and would force Heartland to provide more capital to recognise a higher risk-weighting of these loans.
Of course the example and assumptions quoted – 60 year olds borrowing $100,000 for 24 years, no house price rises, interest rate 9% - are all chosen to produce a ridiculous outcome.
Home equity release loans are currently priced nearer 8%, borrowers begin their loans at ages nearer 75 than 60, the maximum amount to be lent is calculated with common sense, and lenders have discovered the average term of such a loan is eight years not 24.
The newspaper item was prepared on false assumptions, presumably to achieve a ‘’newsworthy’’ angle.
Andrew Ford will have been exactly right when he noted how much these loans have helped some people.
The loans are not intended to meet the needs of everyone.
Many retired people enjoy moving to smaller homes with smaller gardens, some enjoy moving to retirement villages, some have sufficient money to stay put and employ a gardener and a few choose to enter into home equity release loans. The equity in one’s home is available to be used as the owner sees fit.
My guess is that over the next 20 years, people will live longer and have better health, and dare I say it, governments will struggle to finance an ageing population’s expectations of living standards and healthcare.
In this environment, home equity release loans may become much better understood, and more regularly used.
One hopes that Sunday papers will eventually discover that banks and retired people rarely enter into stupid arrangements.