Limited options available for retirees to help fund their retirement.
Retirees are increasingly finding themselves in a precarious financial position, with limited options to adequately fund their retirement years. Despite the fact that financial institutions have had over 35 years to innovate in the retirement income and aged care funding space, the market still lacks suitable products tailored to the needs of this growing demographic – particularly the majority of retirees who are asset-rich and cash-poor. The prevailing retirement funding pillars – superannuation, savings, and reverse mortgages – each come with limitations, leaving many retirees in financial limbo with insufficient retirement funding. This article explores the reasons behind this product gap in the market, the challenges facing financial institutions, and how an innovative solution like Futureproof’s Equity Preservation Mortgage® will soon bridge this gap.
The Squeeze on Financial Institutions
Banks and non-bank lenders are currently facing intense pressure on multiple fronts. With rising interest rates and increased competition, banks are experiencing squeezed on their net interest margins. This environment is further exacerbated by higher wholesale mortgage funding costs. In a bid to maintain profitability and market share, many institutions are engaged in a forward mortgage war, focusing their efforts on competing in the traditional home loan market. Consequently, this leaves little room for innovation, particularly in developing new financial products aimed at meeting the financial needs of retirees.
The focus on forward mortgages and traditional lending products has meant that the specific needs of retirees, especially those looking to unlock the equity in their homes, have been largely overlooked. The lack of innovation in this space is evident when considering that reverse mortgages have remained relatively unchanged since introduced to the market over three decades ago.
The Limitations of Current Retirement Funding Options
Retirees typically rely on three main sources to fund their retirement: superannuation, savings, and reverse mortgages. However, each of these options comes with inherent limitations:
- Superannuation: While superannuation, (private pensions or retirement accounts provide a crucial source of income for retirees, it is often insufficient to cover all expenses. As life expectancy increases, many retirees find their superannuation balances dwindling faster than anticipated.
- Savings: Personal savings can provide additional financial support, but the rising cost of living can quickly deplete these funds. Moreover, the low-interest-rate environment of recent years has made it difficult for savings to grow significantly.
- Reverse Mortgages: Although reverse mortgages offer a way to unlock home equity, they come with drawbacks and at significant cost. The high compounding interest charged on these loans means that the amount owed can quickly balloon, eroding the equity in the home and leaving little for future needs or to pass on to heirs.
The Ideal Retirement Funding Product
Given these limitations, there is a clear need for a new type of retirement income and aged care funding product that better serves the needs of retirees. An ideal product would address the shortcomings of existing options and provide a sustainable, equitable and long-term solution. Such a product would have the following characteristics:
- Mortgage-Based: It should leverage the retiree’s largest asset – their home. With the average home equity standing at approximately $1.5 million (Australia), ₤0.5 million (UK) and $0.7australia
- 5 million (USA), this represents a significant untapped asset.
- High Loan-to-Value Ratio (LVR): Unlike current reverse mortgages that often have restrictive LVRs, the ideal product would allow for up to 80% LVR, similar to forward mortgages. This would enable retirees to access more of their home equity, but it requires interest to be charged as simple interest and to paid, not accrued and compounded
- Age-Independent: The product should not impose age restrictions, making it accessible to a broader range of retirees and even to pre-retirees to better fund their future retirement.
- Low Risk Weighting: To be attractive to financial institutions, the product should be designed with a lower risk weighting, making it less capital-intensive and easier to write on their balance sheets or to securatise in the capital markets.
- Equity Preservation: Most importantly, the product should be structured in a way that does not depelte the home equity of retirees. This would ensure that retirees can still leave all their home wealth as an inheritance to their children or use the funds for aged care as needed.
Introducing Futureproof’s Equity Preservation Mortgage®
Futureproof is set to revolutionize the retirement funding landscape with its soon-to-be-released Equity Preservation Mortgage®. This innovative product is designed to address the critical product gaps in the current market and offer a sustainable solution for retirees looking to monetize their home equity without the detrimental effects associated with traditional reverse mortgages, shared appreciation mortgages and home reversion schemes.
The Equity Preservation Mortgage® embodies all the characteristics of an ideal retirement funding product:
- Utilizes Home Equity: By tapping into the substantial home equity that retirees possess, the Equity Preservation Mortgage® provides a significant source of tax-free funds.
- Higher LVR: With an LVR of up to 80%, retirees can access a larger portion of their home’s value, offering greater financial flexibility and higher retirement income.
- No Age Restrictions: This product is accessible to all retirees, regardless of age, making it a versatile option for a diverse demographic
- Low Risk: The structure of the Equity Preservation Mortgage® ensures it is less capital-intensive for financial institutions, encouraging broader adoption and availability.
- Preserves Home Equity: Unlike traditional reverse mortgages, the Equity Preservation Mortgage® is designed to preserve all home equity, ensuring that retirees’ home capital remains intact. This means retirees can fund their retirement and aged care needs without compromising the inter-generational transfer of wealth within the family.
In conclusion, the current market for retirement funding is characterized by a lack of suitable, innovative retirement income and aged care funding products that meet the unique financial needs of aging customers. Financial institutions, preoccupied with maintaining margins in a competitive and high-interest-rate environment, have neglected to develop solutions that adequately address these needs. The introduction of Futureproof’s Equity Preservation Mortgage® offers a promising solution, filling a critical product gap and providing retirees with a sustainable way to fund their retirement without eroding their home equity.
This transformative mortgage product innovation represents a significant step forward in retirement funding, offering hope and financial security for the aging population in Australia, UK and USA.
