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Government ‘double standards’ placing Australian Pension borrowers at risk

21st August, 2019

The changes to the Pension Loans Scheme (PLS) introduced on 1 July 2019 make the Scheme accessible to more seniors, many of whom are struggling to make ends meet. Whilst we’re only a few weeks in, Pension Boost is fielding a lot of interest in the new Scheme.

The PLS is a reverse mortgage style contract where the Australian Government, via Centrelink or DVA, will provide a loan of up to 150% of the Full Age Pension which is paid fortnightly. The Scheme is secured via a charge over real estate property, which incurs an interest rate of 5.25% p.a., charged on the outstanding loan amount each fortnight.

Since 2012 the Australian Government has required commercial providers (e.g. banks) of reverse mortgages to comply with the National Consumer Credit Act (NCCA) regulations. These and other measures are designed to protect senior consumers via particularly the No Negative Equity Guarantee (NNEG) provisions. The No Negative Equity Guarantee effectively ensures seniors can not end up owing more on their reverse mortgage than what the property is ultimately sold for. This was not the case prior to 2012 when the legislation was introduced to overcome mis-selling risks for seniors when choosing reverse mortgages (such as those experienced in the UK).

In what can only be described as a very poor demonstration of double standard setting, the Australian Government provides no such protection for vulnerable seniors who participate in the PLS. The rationale we’ve been advised for why this is the case is that the PLS:

1. Is not subject to the NCCA regulation because it is classified as a ‘welfare payment’; and

2. Is not technically a ‘reverse mortgage’ (surely they can’t be serious?)

On this second point, compare the features of a regulated reverse mortgage and the PLS:



Feature
Reverse Mortgage
Pension Loans Scheme
Loan
Yes
Yes
Loan draw-downs
Typically lump sum but some provide regular payment options
Fortnightly payments only (no lump sum)
Secured over real
property
Yes (typically via a registered mortgage)
Yes (via a registered charge or ‘lien’)
Acceptable security
Typically restricted to houses or units in capital cities and major centres, except retirement villages and relocatable homes
Any real property in Australia, except retirement villages and relocatable homes
Repayments
No obligation to make regular repayments. Must repay the loan when the property is sold but you can make repayments if you choose to
No obligation to make regular repayments. Must repay the loan when the property is sold but you can make repayments if you choose to
Maximum Loan to Value
Ratio (LVR)
Maximum LVR set is reference to age of youngest person with regulated maximum rates by age
A maximum LVR is applied by reference to age of youngest person with maximum rates by age (whilst different are reasonably consistent with NCCA regulated LVR rates)
Interest rate1
Ranges from 5.46% pa - 6.36% pa; accrued per the contract on outstanding loan
5.25% pa; accrued fortnightly on outstanding loan
Insurance cover
Must maintain adequate levels of insurance
Must maintain adequate levels of insurance
Other obligations
Must notify the lender of proposed material changes to property or dealings in the property
Must notify the government of proposed material changes to property or dealings in the property


Reminds me of the saying ...if it looks like a duck, quacks like a duck, walks like a duck then it’s a duck!

Pension Boost strongly believes that all seniors should be afforded equivalent protection when accessing ‘reverse mortgage style contracts’ irrespective of whether they are provided by commercial providers or the Government.

Absent this crucial consumer protection, the most vulnerable seniors (or their estates) may be exposed to the risk of owing the Government a debt after their home is sold. Based on the 100’s of PLS projections Penson Boost has done for our clients, the seniors most exposed to negative equity risk appear to be those who:

  • Have modest levels of net equity in their homes
  • Have a relatively large existing loan mortgaged against their home
  • Live in remote or rural areas with low property growth rates / prospects
  • Are relatively early in their retirement (late 60’s / early 70’s) so can be expected to live for another 20-30 years

It is difficult to assess the level of negative equity risk but ASIC’s REP-585 Reverse Mortgage Report2 of commercial reverse mortgages found low percentages3 of borrowers would rely on the NNEG at age 84 (being the average age of entry into residential care).

ASIC’s report also provided this useful scenario analysis:

To provide some further context according to the Aussie Home Loans / Corelogic 25 Years of Housing Trends Report4, the median Australian residential property annual growth rates for the 25 years from 1993 to 2018 were 6.8% p.a. for houses and 5.9% p.a. for units. Whilst historic data is interesting, past performance is not an indicator of future performance.

In closing, the recently expanded Pension Loans Scheme is an important government initiative which Pension Boost is confident many seniors will want to access, to help make ends meet and to live a better life.

Pension Boost is committed to the removal of this blatant and appalling double standard. Join our petition - show your support to get the PLS amended to provide No Negative Equity Guarantee protection for seniors.

sign the petition

1 Comparison rates as at 17 July 2019 (Online published rates of Heartland, Household Capital, IMB, P&N Bank, Heritage Bank)

2 https://download.asic.gov.au/media/4851420/rep-586-published-28-august-2018.pdf (refer pages 36-38)

3 “As a result, our data analysis suggests that only two out of 15,053 loans are likely to reach a loan balance that exceeds the market value of the secured property by the time the borrower reaches 84 years of age, assuming that interest rates on these loans stay the same and property prices rise by 3% per annum”.

4 https://www.aussie.com.au/home-loans/property-reports/25years.html

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