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Wednesday, July 16, 2008

Reverse mortgage (equity release) doing badly

I am not sure how it is doing in the rest of the world but in Australia the reverse mortgage market is in full-scale retreat. The fourth lender this year announcing that it is pulling back.

ABN Amro is still in the market but has admitted that conditions were tough. A spokesman said – the quote is taken from The Sheet (subscription only):
“Because of rising interest rates the lifestyle borrowers have disappeared. These are the people who don’t need the money to buy a new car or repair the roof but would like some extra money for travel or to improve their quality of life in retirement in other ways.

“What makes this market tough is that the payback on a reverse mortgage is very long term. Figures from the US and Europe show that the average life of a loan is seven or eight years.

“You get no cash flow during those years and you have to cover set-up costs and commissions. Securitisation gives you some cash but that’s not an option now.”
So companies selling these products to the older market are getting hit both by a decline in demand and the inherent long term nature of the business. I guess that high interest rates and lack of wholesale market liquidity doesn’t help.

I still think that this will be a fantastic long term business opportunity, because for a lot of people it will not be a 'lifestyle' choice but a necessity, but looks like success will be delayed for a while. Dick Stroud

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