Reverse mortgage schemes, or home equity conversions, are well established in Britain and the United States but are relatively unknown in Australia - though that is about to change as several institutions look at re-introducing the concept.
The scheme is designed for "asset-rich, cash-poor" retirees and other fixed-income home owners who owe little or nothing on their homes. It allows them to borrow some of the equity in their property to help pay for living expenses, medical bills and aged care, and can be taken either as a lump sum or as a yearly annuity.
In effect, these people are borrowing against the value of their home, so the longer they borrow, the less equity they retain.
Another version of a reverse mortgage scheme, known as the sale plan, involves the owner selling the home to the bank while reserving the right to continue to live in it.
Reverse mortgages have previously been available in Australia but disappeared from the bank lending market in the 1990s. Advance Bank, which was absorbed by St George in early 1997, was the last major lender to offer such a product.
The deputy director of the Council of Ageing (Australia) Veronica Sheen, who presented a paper on the idea to a conference organised by the NSW Department of Housing and Department of Ageing, says the council backs the concept. "It's a product whose time has come," she says.
Melbourne-based actuary Peter Szabo says reverse mortgages are really just capitalising interest loan, "which means you borrow a sum of money and just have interest on interest on interest".
He says most banks have previously baulked at introducing the scheme because of concerns about how big the loan can become and how much of the equity in the home is going to be consumed by the loan.
"If you take out a loan today, you don't know how long you are going to live and what is going to happen to interest rates, so you don't know what the loan is going to be when the house gets sold," he says. "That uncertainty is not something the major banks have been comfortable with."
Still, with an ageing population, a shrinking income-tax base and only the relatively recent introduction of compulsory superannuation, the Council on the Ageing argues that it makes sense to use Australia's high rate of home ownership - 75 per cent compared with about 50 per cent in most of Europe - to help provide an adequate retirement income for older Australians.
Though the scheme is generally accepted in Britain and the US, images on the nightly news of banks foreclosing and turfing out elderly couples who have lost all the equity in their homes would be unlikely to meet with wholesale public approval.
However, St George last month launched a national reverse mortgage scheme that it says overcomes this problem with contractual guarantees that the loan will only become due on the sale of the property or death, and that any losses, should the loan balance exceed the sale price, will be absorbed by the bank.
Mr Szabo has also spent the last few years developing a similar "equity-secure" scheme - The Home Equity Lifestyle Plan - that he plans to launch in Melbourne and Sydney before the middle of the year, though at this stage details are scant.
More is known, however, about St George's Seniors Access Home Loan. Its customers aged between 65 and 69 can borrow a minimum of $10,000 to a maximum of $80,000 or 15 per cent of the valuation of the property, whichever is lower, at an interest rate of 7.57 per cent. Those aged 70-plus can borrow between $10,000 and $100,000, or 20 per cent of the value.
No repayments are required during the loan's term as all interest, fees and charges are added each month to the loan balance, with interest accruing on the increased balance. Borrowers may make a repayment at any time, free of charges.
"While there is strong demand for this type of product," says Andrew Thorburn, the bank's group executive for personal customers, "we recognise it must be managed responsibly and we require anyone considering this loan to seek independent financial and legal advice.
"We strongly encourage customers to discuss the conditions of the loan with their family."
Ms Sheen says this family discussion is important as there have been cases overseas where families, who thought they were to inherent the family home, have taken banks to court in an attempt to have the loan contract declared null and void after their parents' death.
The Commonwealth Government, through Centrelink, offers a plan in a similar vein known as the Pension Loan Scheme for those who qualify for only a part pension, or none at all, because either their income or asset base is too high.
The scheme allows participants to receive an income up to the same as the full pension.
If you want to set aside part of the value in the property to pay for your move into a retirement home later, you can nominate a set amount for that purpose.
For example, the property is valued at $210,000 and you want to set aside $85,000 for your retirement village unit.
Under the Centrelink scheme, you give Centrelink an entitlement to recover $125,000 from the eventual sale of your home. Centrelink uses this money to effectively pay you a fortnightly amount up to the full aged pension.
