Reverse Mortgages Need Tighter Rules

Australia is the first country that has begun to implement a more restricting layout for reverse mortgages. The program, popular with borrowers in their retirement, has thus far been lax about the rules.

It has been put forward by the Australian government that, before a borrower can receive a reverse mortgage, they should consult with an independent financial planner. The idea behind a reverse mortgage is that once a home is owned without a mortgage, the homeowner can borrow against the value of their home. Many retirees have opted for the reverse mortgage as a way to increase their standard of living but the program is not without risks.

A mortgage broker, who is not legally responsible to go over the risks of a reverse mortgage with their client, usually sells the programs; since they are not licensed financial planners they cannot be held accountable for their borrowers personal decisions. The IAA is hoping to instigate a plan where a financial planning condition will be added to code of conduct for reverse mortgages. The programs, which are currently valued at $1.5 billion Australian, can become sticky due to payment. A reverse mortgage allows a person to draw a lump sum out of the value of their home. No interest is charged, and low payments are required for the draw. The interest is paid back when the house is sold, usually at a high percentage, causing the total loan to sometimes exceed the value of the home.