Future of Financial Advice
Best Advice Rule & Product Comparison
Following COVID19 the world is expected to be in a low interest rate environment for the next 10 years. This disrupts retirement funding plans and reduces the income of self-funded Retirees.
Futureproof is committed to delivering new low-risk fiscally responsible financial products to better meet Client needs in retirement.
We believe traditional equity release products are not fit-for-purpose and the market is clearly telling us that annuities are not selling.
There has to be a better solution for asset-rich / cash-poor clients than simply downsizing to free up capital and carrying unacceptable levels of risk in retirement.
The reverse mortgage, of course, uses compound interest, such that debt doubles every 9-10 years and depletes all home equity usually within 20-25 years.
The market for reverse mortgages will always be constrained by the tight Borrower eligibility age and loan-to-value limits imposed by Lenders to avoid negative equity risk, typically (Source IMB):
- minimum Borrower age 70 years
- maximum 45% loan-to-value ratio
- small loan principal
Age of Youngest Borrower:
70 years = 18% LVR
75 years = 23% LVR
80 years = 32% LVR
85 years = 36% LVR
90 years = 41% LVR
95 years = 45% LVR
The bottom line is that the average annuity amount released by a reverse mortgage is wholly inadequate to fund retirement, at just $80,000-$100,000 per mortgage.
Equity Preservation Mortgage
Our Equity Preservation Mortgage™ is a nextgen smart mortgage to be released by Futureproof to underpin our 1st Generation of Futureproof products.
The first to be released in the Futureproof Retirement™ product to go head-to-head and replace reverse mortgages.
Futureproof Retirement™ operates very differently by using simple interest, such that it is not constrained by age and LVR restrictions, has no negative equity risk and delivers more higher annuity income – all without depletion of home equity.
It is a game-changing product for financial advisers and their Clients and the average annuity amount released to a Retiree is $400,000 – $450,000 per mortgage, representing an annual draw-down rate that well exceeds term annuities, allocated pensions and reverse mortgages.
Equity Preservation Mortgage -v- Reverse Mortgage
Standard Loan Example (average Retiree)
- primary borrower aged 60 years on $80,000 p.a. with average male superannuation balance ($270,000)
- secondary borrower aged 60 years on $60,000 p.a. with average female superannuation balance($157,000)
- both to retire at 65 years of age
- average property value for seniors is 42% above the capital cities median house price ($1.1M)
- average house price growth (4% p.a.)
- average cash savings + other assets at retirement ($150,000)
- no lump sum requested
- needs annuity income top-up of $30,000 p.a.
- wants fixed annuity income period of 15 years
- lifetime mortgage with no fixed repayment term
- reversionary rights to partner
- expected mortality = 30 years (i.e. life expectancy adjusted for sex, age & longevity)
- full mortgage insurance cover to protect borrowers (no capital risk, no investment risk, no negative equity risk & existing equity guarantee)
The graphs below bring into stark contrast the differing financial outcomes of each product for Clients.
Visit our Annuity Income & Loan Calculator to analyse this Standard Loan Example in detail.
Equity Preservation Mortgage
The Black Star represents expected mortality date, with the key financial indictor being the gold graph line showing net equity preserved.
EQUITY LEFT :
- at end of Annuity Period = $1,100,000
- at expected Mortality Date = $3,1112,227
The Black Star represents expected mortality date, with the key indictor being the gold graph line showing net equity preserved.
EQUITY LEFT :
at end of Annuity Period = $1,035,475
at expected Mortality Date = $0
The unacceptable retirement gamble
Consumer lending codes, financial advice standards and ‘best advice’ rules set by Regulators now require financial advisers to consider very carefully what retirement funding products are best suited to the needs of their Clients.
It would be a brave financial adviser that continues to recommend a reverse mortgage that leaves their Clients without sufficient funding to pay for their future medical needs and aged care accommodation.
These Clients are self-insuring far too many key risks:
- interest rate risk – any increase in rates will rapidly increase equity depletion
- house price risk – any adverse changes in property value will rapidly increase their equity depletion
- retirement funding gap – this emerges following the end of the annuity income period and rapidly increases over the remaining loan term
- longevity risk – the longer they live, the greater the rapid accumulation of debt and depletion of home equity
In the reverse mortgage example above, the entire Client scenario from aged 75 years (i.e. from year 15 of the loan term or end of the annuity period) onwards, becomes a self-insured gamble based on their continuing health.
However, the realities of ageing are likely to see one or both of them needing to transition into low care as they can no longer age in the home or, more urgently, into high care following a medical episode (illness, dementia, heart attack or stroke).
Here the gamble fails – there is insufficient remaining equity to pay for one (let alone two) accommodation bonds….just at the most vulnerable stage of their lives.
To fail to advise a Client of this hidden risk is neither responsible lending nor ethical advice.
Some regard might also be had to the Client’s family, as their inheritance is rapidly being eroded by these inferior products. This retirement gamble and the lost inheritance will soon become fertile grounds for professional negligence and class actions by Clients and their beneficiaries.
Annuity Income & Mortgage Calculator
Use our Annuity Income & Mortgage Calculator to assess how the Equity Preservation Mortgage™ and the Futureproof Retirement™ product can assist you to deliver better financial outcomes for your Client