The biggest impact on Heartland Group’s Australian reverse mortgage business from Kenneth Hayne’s royal commission is likely to be his recommendation to ban lenders paying mortgage brokers commissions.
Andrew Ford, chief executive of Heartland Seniors Finance, says mortgage brokers are currently a key part of its distribution network in Australia, accounting for about 70 percent of its reverse mortgage business in that country.
Australian Treasurer Josh Frydenberg has promised to ban trail commissions – which are paid annually as long as a mortgage remains on a bank’s books – from July 1, 2020. He wants further study on whether upfront commissions should be banned.
Hayne’s recommendation was that all commissions should be banned and that mortgage brokers should charge their clients fees for service instead.
The rest of Heartland’s Australian sales are achieved directly through its website and other marketing efforts.
In New Zealand, hardly any of Heartland’s sales of reverse mortgages, a product that allows people over 65 to draw on the equity in their homes with repayment deferred until either their house is sold or they die, are through mortgage brokers.
Heartland has never paid volume-linked commissions, another practice Hayne wants banned, so “overall, it’s going to have no real impact on our business here,” says Ford, who is based in Melbourne.
“Reverse mortgages are such a specialist niche product that only a few brokers handle them.”
Heartland is seeing increased demand in Australia for its product, both because the banks have largely withdrawn from the market and because Australia’s population is ageing – more than 20,000 Australians turn 65 every month.
Westpac and Macquarie Bank both withdrew from the Australian reverse mortgage market in late 2017. Commonwealth Bank of Australia and its subsidiary, Bankwest, withdrew from Jan. 1 this year.
You don’t have to look far to understand why. The Australian Securities and Investments Commission has singled this part of the market out for heightened scrutiny because of the vulnerability of the elderly.
The departure of the banks leaves Heartland as the only active lender in that part of the market. It says it had 19.8 percent of the outstanding reverse mortgages in the Australian market at June 30 last year, up from 14.9 percent a year earlier.
In August last year, ASIC told CBA to end its “tick-a-box” approach to the product when approving new reverse mortgages and it wanted lending standards generally to be improved, including the removal of clauses ASIC deemed had the potential to be unfair.
Nevertheless, ASIC found that all of the 30 borrowers it interviewed were satisfied with the product and it concluded that reverse mortgages “can help many Australians achieve a better quality of life in retirement.”
Heartland’s own recent survey of customers found 96 percent of its customers said they would recommend Heartland to friends and family.
That high level of satisfaction probably accounts for why Hayne’s commission didn’t mention the product in his final report released on Monday.
Ford says Heartland made a number of changes to its Australian product after the ASIC report but its decision to introduce a 30-day cooling off period last October wasn’t one of them.
Heartland’s New Zealand reverse mortgages have had that feature for some time and introducing it in Australia was part of a process of aligning its practices in both countries.
Mandatory consumer protections applying to reverse mortgages in Australia include getting independent legal advice and customers being advised of other options, including selling their house and downsizing to a smaller one.
While New Zealand doesn’t have such protections, Heartland says it adheres to these requirements in New Zealand.
The product falls squarely within Heartland’s strategy of avoiding going head-to-head with the mainstream banks and to operate in niche segments where there’s little competition.
It bought the Seniors Finance operations in April 2014 and, with net receivables of NZ$1.13 billion, the product now accounts for 28 percent of its total receivables.
The business is growing apace: it accounted for 54 percent of the increase in receivables in the September quarter last year – Heartland is due to report its results to Dec. 31 on Feb. 19.
One reason Heartland’s product appears to pass muster with regulators is that the amount it will lend is very conservative: its Australian website shows it will lend a mortgage-free 60-year-old whose home is worth A$500,000 a maximum of A$75,000.
If that person wants to protect a portion of their equity, the maximum loan falls commensurately.
An 85-year-old with a home of the same value can borrow a maximum of A$150,000.
Ford says on average, borrowers take out loans worth only about half the maximum Heartland will lend.
The average loan-to-valuation ratio of its book is 25 percent and 90 percent of loans have LVRs below 40 percent.
Only 36 loans, or 0.8 percent of the total book, have LVRs above 60 percent and the average age of these loans is 11.8 years with the youngest of these borrowers being 88 years old.
Heartland says it gets loans revalued when they reach a 70 percent LVR and that usually results in the LVR reducing.
Heartland restructured late last year to exclude its Australian reverse mortgage from Heartland Bank so that growth in the Australian business wouldn’t be crimped by regulations affecting the banking operations.
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