Futureproof Financial CEO John Innes has claimed that a new product, the Equity Preservation Mortgage, could make reverse mortgages and similar products obsolete within two years. The new product, which is fully insured and pays interest rather than accruing and compounding it, has been designed to address the “inherent defects” of existing products. According to Innes, the Equity Preservation Mortgage will enable retirees and those with equity to generate an income stream without depleting their equity, revolutionising retirement funding. The product could also benefit brokers as there are no age restrictions. Futureproof has partnered with IMS Digital Ventures to scale the new mortgage product globally, with plans to launch it in mid-2024.
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Tackling the retirement funding gap
In the western world, many retirees are asset rich but cash poor, with the average retiree’s savings being funded for just ten years, despite retirements often lasting 20 years, according to Innes. He noted that about 70% of retirees in Australia are homeowners, and the average house price for these seniors is around AUD 1.1m ($838,000).
Innes argues that these customers face a retirement funding shortfall, which could leave them in “real trouble” if they were underfunded or had less equity due to a reverse mortgage.
Innes believes that younger generations are also affected by the retirement funding gap as they cannot get into the property market, making it difficult for them to fund their own retirement.
Problems with reverse mortgage products
Reverse mortgages, which have been in use for over 35 years, have been criticised for their in-built capacity to deplete borrower equity. An ASIC review of the market in 2018 found that while they do allow older Australians to achieve their immediate financial goals, longer-term challenges do exist, with borrowers paying “little to no attention to the longer-term implications of their loan.” Additionally, compounding interest every month means that the borrower’s debt doubles every ten years, and they are in negative equity in 20 years, depending on house prices. Reverse mortgages, shared depreciation, and reverse equity mortgages are not fit for purpose and are inherently defective, according to Innes. As a banking product, reverse mortgages are 100% risk-weighted and intensive to write, which is why most lenders do not offer them. The Equity Preservation Mortgage, however, is only 50% risk-weighted, making it twice as efficient for lenders to write.
Key Takeaways:
- The Equity Preservation Mortgage could make reverse mortgages and similar products obsolete within two years.
- The new product is fully insured and pays interest rather than accruing and compounding it, enabling retirees and those with equity to generate an income stream without depleting their equity.
- The product could revolutionize retirement funding and benefit brokers as there are no age restrictions.
- Many retirees in the western world are asset rich but cash poor, and face a retirement funding shortfall, leaving them in “real trouble” if they were underfunded or had less equity due to a reverse mortgage.
- Reverse mortgages have been criticized for their in-built capacity to deplete borrower equity, with borrowers paying “little to no attention to the longer-term implications of their loan.”
- The Equity Preservation Mortgage is only 50% risk-weighted, making it twice as efficient for lenders to write.
