Productivity Commission Research Paper

Retirement Home Equity Release Market

Retirement Home Equity Key points

  • Most older Australian home owners on low incomes could achieve a modest retirement living standard over the remainder of their lives by drawing on their home equity.
  • Equity release products (ERPs) are designed to enable older home owners to withdraw equity while still living in their homes. Most currently available products are reverse mortgage loans, and these are the only ERPs that are regulated at the federal level, but new non-credit products are also emerging in some jurisdictions.
  • The market for ERPs is small and has stagnated in recent years — with 40 000 outstanding ERPs nationwide, they comprise just 0.4 per cent of the home equity of older Australians. This is due to both demand and supply side constraints.
    – Demand is impeded by consumer preferences affecting the family home and debt; negative perceptions of the products; poor financial literacy and information; high costs and risks; and disincentives arising from the tax and transfer treatment of the principal residence.
    – Providers and investors show little interest in the products due to the relatively small market size; the risks caused by the uncertain timing and value of returns; costly prudential and regulatory requirements; the lack of a consistent regulatory framework across ERPs; and the reputational risk inherent in offering the products.
  • Some of these impediments are unlikely to change. They simply reflect underlying consumer preferences, the commercial decisions of funders and suppliers, and fundamental characteristics of the products themselves.
  • Providers could partially address certain impediments through greater investment in promotion, more innovative product design, and competitive pricing.
  • Government could reduce regulatory barriers by easing the more prescriptive regulations on reverse mortgages, and developing overarching principles-based regulation for all ERPs.
  • There is little rationale for active government intervention in the equity release market in the current policy environment. Options for intervention could be carefully considered in the event of substantial reforms to tax and transfer policies affecting the principal residence.