Who must, and when
The duty sits in section 133DB of the National Credit Act. ASIC’s information sheet INFO 185 says a credit licensee must use the calculator to make the equity projections before making a preliminary or final assessment of unsuitability, so the projections come first.
ASIC’s regulatory guide on responsible lending, RG 209, puts the duty on credit providers and credit assistance providers alike, and says they must also give the consumer a reverse mortgage information statement. Moneysmart, writing for borrowers, simply says “your lender or broker”. The instructions built into the calculator have been approved by ASIC under section 133DB(1)(a) of the Act and regulation 28LD(2) of the National Credit Regulations.
The three scenarios
INFO 185 says the borrower must be shown or given the projections for three scenarios. On this guide’s illustration, they look like this:
- Scenario 1
The loan as set up
How much the debt will increase over time, and what that does to the equity held in the home.
At 80: owed about $387,000, left about $697,000. At 85: owed about $542,700.
- Scenario 2
No growth in the home’s value
The calculator’s second scenario sets property growth at 0%.
At 80: owed about $387,000, left about $213,000. At 85: left about $57,300.
- Scenario 3
Interest rates 2% higher
How the equity is affected if interest rates are 2% higher.
At 80: owed about $560,400, left about $523,200. At 85: owed about $862,300.
Illustration onlyWorked by hand for this guide, not output from the calculator: a $600,000 home at 60, $100,000 borrowed once, the home rising 3% a year except in scenario 2, interest at 7% a year (9% in scenario 3) added once a year, no fees or further drawings. Real projections use the loan’s own figures.
Where the reverse mortgage’s annual percentage rate is known, it is used, and the higher-rate scenario uses it plus 2%. ASIC’s own example is 6.74% a year becoming 8.74%.
Why these three
The second and third scenarios test the two things nobody at the table controls: what the home will be worth and what interest will cost. ASIC says plainly that it does not forecast interest rates or regulate the residential property market. So the projections do not try to guess. They show the loan as set up, then the same loan with no growth in the home’s value, then with rates 2% higher, and leave the borrower to see how much room each one leaves.
Moneysmart describes the purpose in a borrower’s terms: the projections show the impact on the home’s equity over time, and Moneysmart’s suggestion is to take a copy away and discuss it with an adviser.
What the calculator assumes
- House values rise 3% a year unless the figure is changed.
- The interest rate starts at 7% a year; where the loan’s annual percentage rate is available, it can be entered instead.
- Choosing the lender applies its limits, including its loan-to-valuation ratio, minimum borrowing age and maximum loan amount.
- The calculator will not work out a payment amount once the loan-to-valuation ratio passes the amounts prescribed for the reverse mortgage selected.
- When entering payment amounts, the licensee must consider the presumptions of unsuitability in regulation 28LC of the National Credit Regulations.
- The youngest age it accepts is 55, though Moneysmart notes most lenders do not offer a reverse mortgage to anyone under 60.
How the projections reach you
Shown or sent
Section 133DB has the lender or broker show the borrower the projections in person, or give them in a way the regulations prescribe. ASIC’s information sheet says giving them may be by mail, email or any other written or electronic means the borrower agrees to.
A printed copy of each scenario
Separately, they must provide a printed projection of each scenario. ASIC says giving the projections in printed form may satisfy that duty too.
In colour
ASIC says all printed copies given to the borrower should be in colour.
Time to think
ASIC says the borrower should be given a reasonable time to review the projections and consider their current and future circumstances.
Reading them
The calculator’s own notes say its amounts are estimates, and “not a prediction”. ASIC does not forecast economic or market conditions such as interest rates, and does not regulate the residential property market. Moneysmart’s word to borrowers is to get a copy of the results to take away, and to ask about anything they are unsure of. It also says the results are not advice about a financial product, and suggests considering advice from an independent professional before deciding.
Two questions belong beside the projections. The law requires inquiries about the borrower’s future needs, including the possible need for aged care accommodation and whether they would prefer to leave equity in the home to their estate. ASIC also treats an inquiry into the borrower’s eligibility for Centrelink payments as an essential part of checking the loan, and says it expects a high standard of investigation and verification to make sure a reverse mortgage meets the borrower’s requirements and objectives.
In this site’s illustration, the debt catches up with the home soonest in scenario 2, at about 87, and in scenario 3 at about 92. What happens if it passes it is the subject of the no negative equity protection; why the line climbs at all is in how the balance grows.