loan and interest on it are paid back when the home is sold, when the borrower permanently moves away (for example, move into long-term care), or upon death. In Australia the products are generally available to consumers aged 55 and over who own their own homes or only have a small mortgage outstanding. The amount available to be borrowed is usually restricted to between 20 percent and 40 percent of the total property value.

The market for equity release products in Australia is developing rapidly. According to a recent study<sup>40</sup> reverse mortgages grew from $459 million at the end of 2004 to $1.5 billion at 31 December 2006. The average age of borrowers is 74, although younger borrowers are the fastest growing group. Although lump sums continue to dominate, accounting for over 80 percent of all outstanding loans, regular draw-downs are increasing and represented 20 percent of new loans in 2006 indicating that more people are using the product to supplement their pensions (SEQUAL 2007). This growth of reverse mortgages has the potential to further impact attitudes towards annuities by giving many Australians access to additional income streams without purchasing an annuity product.

Reverse mortgages have not been without their problems in the United States and the United Kingdom where there have been cases of mis-selling and evictions. In Australia the product is subject to a range of existing consumer regulations. In addition, some reverse mortgage providers have established an industry association, Senior Australians Equity Release Association of Providers (SEQUAL) which has a Code of Conduct and compels its members to belong to an approved External Dispute Resolution (EDR) scheme.

Reverse mortgages may have significant taxation implications, and can affect a consumer’s entitlement to the public pension and associated benefits and concessions. It can also affect the amount of daily care fees that will be levied if the retiree has to enter an aged-care facility.

# **8 Concluding Remarks**

Observers have often puzzled over why the annuities market, especially the market for lifetime annuities, is not more developed in Australia. Australians are living longer and face uncertainty regarding the level of their retirement income. The two mains reasons for the lack of lifetime annuities appear to be that people can rely on the age pension if they have to, and a great desire to have flexibility in investment options which is not available if they purchase a lifetime annuity. In the past 20 years there has been a dramatic change in the attitudes of Australians towards saving for retirement. Most now feel that if they are to have a comfortable standard of living in retirement they will need to supplement the government provided age pension.

Australians are building up substantial balances in the private pension system, mainly as a result of the compulsory SG requirements, but increasingly for many through additional private savings. These continue to be taken as lump sums but there is evidence to suggest that the funds are being invested prudently in a range of retirement income products The greatest motivation is the ensure that the funds will last people through retirement, and

> 40 Senior Australian Equity Release Association Lenders/Trowbridge Deloitte, “Reverse Mortgage Study”, April 2007.

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