Home Equity Release

1
Home Equity Release A new product for New
Zealands future
HealthCare Providers New Zealand Annual
Conference 8-10 August 2005

• David Kidd
• Regional Manager Northern

www.publictrust.co.nz
2
Session Agenda

• Overview of home equity release products and
  market
• Factors influencing development of the home
  equity release market in NZ
• Alternatives to home equity release
• Future of home equity release in NZ
• Conclusions
• Questions?

3
What is Home Equity Release?

• A form of home loan which allows you to convert
  or release a proportion of the value of your
  primary residential property asset your home
  without having to sell it.

4
Main types of Home Equity Release

• Home Equity Release (HER) Loans allows you to
  convert home equity in to a tax free lump sum
  payment (s)
• Reverse Annuity Mortgages (RAM) enables you to
  use home equity to purchase an annuity that
  provides a regular income (technically this is an
  insurance product)
• Other products include Reversion Mortgages, Sale
  and Leasebacks, Shared Appreciation Schemes

5
Common Features of NZ Home Equity Release Products

• Minimum borrower age ranging from 55-65 years
• Loans are secured as first mortgages against the
  borrowers primary residence
• Debt accumulates as a rising loan so no regular
  repayments of either interest or principal are
  required
• Loans are only repaid at termination borrower
  (s) ceases to live in the property or dies

6
Common Features of NZ Home Equity Release Products

• Provide guarantees that total loan debt will
  never exceed the value of the property
• Most guarantee lifetime tenure in home
• Establishment fees
• No early repayment penalties
• Interest is charged at a premium of 1.5 to 2.5
  above Reserve Bank OCR/Treasury Bills/or standard
  variable rates for residential mortgages

7
What do people use home equity release loans for?

• Capital expenses
• home renovations/repairs, car replacement
• Living expenses
• to supplement other income - typically NZ
  Superannuation
• Lifestyle enhancers
• holidays, furniture etc
• Emergency (one-off or rainy day) funds
• medical care, support for family

8
Issues to consider with Home Equity Release

• Must be appropriate to need intended use
• Loan Type HER or RAM?
• Fees
• Set up loan establishment fees of 895-1,750
  legal fees for advice and conveyancing property
  valuation fees
• Ongoing fees periodic property valuations,
  drawdowns/top-ups
• Interest rates
• fixed or variable
• Key determinant of likely impact of loan on home
  equity

9
Issues to consider with Home Equity Release

• Impact on other government benefits
• NZ Super entitlement for younger spouses
• Residential Care Subsidy
• Community services card/disability allowance
• Flexible Products
• Transferability
• Early repayment options
• Selecting a reputable Loan Provider
• Security, stability and reliability of provider
• Impact on Estate/Inheritance
• Need to obtain sound independent advice legal
  and financial

10
Home Equity Release Market Size relative to
total home lending and equity

• HER market is rapidly growing in NZ, but
  represents less than 0.1 of Total Home Lending

11
Home Equity Release MarketHistory in NZ

• 1990 Housing Corporations Helping Hand scheme
  was NZs first Home Equity Release initiative
• 1990 Invincible Life Assurance established
  first commercial Reverse Annuity Mortgage Product
• 1991 Taranaki Savings Bank released Retired
  Beneficiaries Loan Facility
• Slow uptake due to poor public perception and
  limited appeal of Reverse Annuity Mortgages
• Loans distributed primarily through financial
  advisors or direct to consumer

12
Home Equity Release MarketMain New Zealand
Providers - 2005

• Sentinel
• Established in 2004 by founding owners of
  Sovereign Insurance
• Market leader 50m loans settled and pipeline
  of 12-14m, 1,600 clients with average age of 73
  and loan size of 42,000 (60,000 for Auckland
  region)
• Lifetime Loan with minimum loan value of 100,000
  and maximum total loan value of 500,000
• Interest charged monthly
• Lump sum cash, plus Top up facility
• Lifetime tenure and loan repayment guarantee
• Retirement Village Association product
  available on licence to occupy properties
  leased from RVA members

13
Home Equity Release MarketMain New Zealand
Providers - 2005

• SAI (Save and Invest)
• Formerly Invincible Life Assurance, now part of
  listed finance company Dorchester Pacific Group
• Offered RAM HER products since early 1990s
• Core product until recently was Reverse Annuity
  Mortgage (no longer available?)
• Minimum loan value of 250,000 on urban
  residential properties only (some exceptions)
• Maximum total loan value of 1m
• 10 year term, with option to renew
• Repayment guarantee additional charge
• Periodic home valuations 5 years
• Interest charges compounded annually

14
Home Equity Release MarketMain New Zealand
Providers - 2005

• Lifestyle Security
• Subsidiary of Avon Investments Limited and joint
  venture with Financial Freedom Senior Funding
  Corporation (Lehman Bros USA)
• Line of credit facility
• No ongoing fees, but undrawn credit attracts
  interest of 5 p.a.
• No minimum loan value or maximum total loan
  values
• Interest charged and compounded quarterly
• Lifetime tenure and repayment guarantee

15
Factors influencing development of the HER Market
in New Zealand

• Key market driver is an ageing population who are
  asset rich and cash poor
• Demographic trends
• Homeownership
• Household assets and income
• Household savings ratio
• Public perception

16
Factors influencing development of the HER Market
in New Zealand

• Demographic trends
• 2001 Census 450,423 people aged 65 (12
  population)
• People are living longer by approx 1 year per
  decade
• Life expectancy for men85.3 and women88.5
• 65 age group will increase 100,000 by 2011 and
  600,000 by 2051 (26 of total)
• Ethnicity 85-90 of 65 age group are NZ
  European/Pakeha
• Gender women make up 70-80 of 85age group
• Greater longevity may require assets to be used
  to sustain living standards in old age
• Judith A. Davey NiRA Report on Home Equity
  Release 2005

17
Factors influencing development of the HER Market
in New Zealand

• Ageing population trend

• Source Statistics New Zealand

18
Factors influencing development of the HER Market
in New Zealand

• Home ownership rates
• Increase with age with the majority of homes
  being mortgage free by retirement
• 40-64 years 780,000 home owners, approx 50 are
  loan free
• 60 years over 80 home owners and 69 are
  mortgage free
• 68 in 2001, down from 74 in 1991
• Research from UK indicates that Baby Boomers are
  divesting from property assets

19
Factors influencing development of the HER Market
in New Zealand

• Household assets and income
• Household net worth (assets less debt) increases
  with age
• 60 age group have lowest household income with
  high dependency on NZ Super
• Living Standards Survey (2001) - indicated that
  income relative to needs for 65 year olds
• 38-50 had not enough/just enough
• 36-50 had enough
• 13-14 had more than enough

20
Factors influencing development of the HER Market
in New Zealand

• Household Balance Sheet (2001)
• Source Statistics NZ

21
Factors influencing development of the HER Market
in New Zealand

• NZ Household savings ratio
• Reserve Banks June 2005 Monthly Bulletin
• Household savings have declined rapidly over last
  15 years
• Trend is in line with other OECD countries,
  although household indebtedness is rising faster
• RBNZ forecasts an adjustment in consumer
  behaviour in near future

22
Factors influencing development of the HER Market
in New Zealand
23
Factors influencing development of the HER Market
in New Zealand

• Public Perception
• Influenced by a combination of life stage
  segment and personal circumstance/choice
• Image of home equity release, particularly in
  media has not been wholly positive
• Research in UK shows high levels of
• scepticism and suspicion about HER products
• satisfaction from HER customers
• Peoples attitude to home equity release can be
  broadly categorised into two groups
• A risk to their most important asset
• An opportunity to unlock the capital

24
Factors influencing development of the HER Market
in New Zealand

• HER as a risk to most important asset
• HER viewed as a debt product which exposes most
  important asset to undue risk
• Older Legacy generation (born before 1940) appear
  to most strongly hold this view of HER
• conservative, risk and debt averse
• very strong desire to own home outright
• predisposed to leave an inheritance
• However some over 65s are uncompromising in
  their desire to assert their freedom of choice,
  protect their lifestyle and independence

25
Factors influencing development of the HER Market
in New Zealand

• HER seen as an opportunity to unlock capital in
  major asset
• To improve and maintain lifestyle in retirement
• Debt consolidation
• Prevent need for downsizing or distressed sales
• Younger Legacy (60-65years) group and older Baby
  Boomers (born 1946-1954) appear to most strongly
  hold this view
• HER is simply an advance on hard earned assets
• Maintaining lifestyle in retirement a priority
• Form of insurance policy in for use in emergency
• Inheritance is on a whatevers left basis
• Young Baby Boomers and GenXs appear to be
  encouraging their parents to use house equity

26
What are the alternatives to Home Equity Release?

• Most New Zealanders home represents their
  largest, and only major capital accumulation
• Hence alternatives to HER necessarily focus on
  changing or intensifying housing use
• Trading down
• Renting
• Sharing
• Subdivision

27
What is the future of Home Equity Release in New
Zealand?

• Look to experience of home equity release in
  other markets UK and Australia as indicative
  of likely development
• 10 key factors shaping future of HER market in
  New Zealand

28
Home Equity Release Market Comparisons

• UK
• Mature, regulated market which started in 1960s
• Economic downturn in late 1980s severely
  impacted HER markets
• self regulation by SHIPS (1991 onwards)
• statutory regulation by FSA (2004 onwards)
• Revived from mid 1990s - double digit growth in
  recent years
• HER still accounts for less than 0.5 of total
  home lending, but worth over GBP 1.2bn in loan
  value
• Norwich Union Northern Rock are market leaders
• Key market drivers
• Mortgage interest tax relief (stopped in 1999)
• Inheritance tax at 40 on Estates over GBP
  263,000

29
Home Equity Release Market Comparisons

• Australia
• Young, but competitive market (1987 onwards)
• 10 major providers - seven private and three
  State owned including Commonwealth Bank, St
  George and Maquarie Bank up six from June 2004
• Self regulated market through Senior Australians
  Equity Release Association of Lenders (SEQUAL)
• 2004 HER Loan market value estimated at AUD
  250million (Datamonitor)

30
Factors shaping HER Market in NZ

• DATAMONITOR Report on Reverse Mortgages in
  Australia and New Zealand 2005
• Identified 7 key factors driving interest in HER
• Competition
• Rapidly improving availability, choice and
  flexibility of HER products
• Barriers to entry size of market opportunity,
  capital and cash flow requirements, investment
  returns, risk management, marketing issues
• Historic property prices
• average 6-8 p.a. with double digit growth over
  last four years

31
Factors shaping HER Market in NZ

• Home Equity Release part of a trend to access
  home equity not just build upon it
• Demographics ageing population
• Poor retirement incomes
• Increased media coverage improving public
  perception and acceptance
• Property now seen as a retirement funding vehicle

32
Factors shaping HER Market in NZ

• Three other key factors
• Changing attitudes to inheritance
• Self regulation establishment of Safe Home
  Equity Release Plans Association (SHERPA) in July
  2005
• Government intervention
• Legislation - HERs now subject to terms of
  Credit Contracts and Consumer Finance Act (2003)
• Proposed Code of Practice via Office of Senior
  Citizens
• Saving scheme incentives Kiwi Saver

33
Home Equity Release market in 2010?

• Increased competition
• 6-7 providers including one major Bank?
• Wider range of HER products
• Reversion mortgages, sale leaseback.
• Increased consumer protection
• Mature HER markets characterised by both self and
  statutory regulation Eg UK, US
• More positive economic policy environment
• Government guarantees?
• Mortgage interest tax relief?

34
Home Equity Release market in 2010?

• Estimated market size

• Assumptions
• Total Home Lending increases in line with a
  property price increase of 6 p.a. (based on
  historical trends)
• Total HER Loan value remains at same of total
  home lending as at 2004/05

35
Conclusions

• Potential market for home equity release in New
  Zealand is large in terms, but not mass market
• NZs relatively young and immature home equity
  release market is set to grow rapidly over next
  5-10 years
• Public perception of home equity release as an
  acceptable (and necessary) form of personal
  finance is rapidly changing
• Economic, social and political environment is
  likely to positively influence growth in home
  equity release market

36
Any Questions?
37
Reading and Reference Material

• Datamonitor Report on Reverse Mortgages in
  Australia and New Zealand 2005
  www.datamonitor.com
• New Zealand Institute for Research and Ageing
  (NZiRA) Report on The Prospects and Potential
  for Home Equity Release in New Zealand Update
  to 2005 Judith A. Davey
• www.osc.govt.nz Office for Senior Citizens NZ
• www.rbnz.govt.nz Reserve Bank of New Zealand
• www.stats.org.nz Statistics NZ
• www.sorted.org.nz consumer finance website
• www.sentinel.net.nz HER provider
• www.sai.co.nz HER provider
• www.lifestylesecurity.co.nz HER provider
• www.sherpa.org.nz NZ industry self regulation
  association
• www.sequal.org.au Australian industry self
  regulation association
• ww.fsa.govt.uk UK industry statutory regulator
• www.ship-ltd.org UK industry self regulation
  association
• www.cml.org.uk Council of Mortgage Lenders (UK)