As the trend toward an ageing population with a high dependency ratio increases, and the fiscal and social consequences of poorly planned public policies becomes apparent, the question of how retirement and aged care will be sustainably funded has become an area of major concern for Governments worldwide. For the typical retiree, the equity built up in the family home will be, more often than not, their most valuable financial asset – this represents a pool of previously untapped capital that could be accessed to fund retirement and aged care needs. When maintained and passed down it also provides a huge wealth-building advantage for following generations. Yet increasingly, more and more retirees feel compelled to sell the family home in order to access much needed capital to see them through a longer than anticipated retirement.
Global population ageing has been flagged by the United Nations as one of the most ‘significant social transformations of the twenty-first century, with implications for nearly all sectors of society’. Thanks largely to advances in medical science and improved living conditions, the portion of the population aged 65+ is growing at a faster pace than all other age groups – the average retiree now faces the prospect of a retirement up to 20 years longer than the historical average. Unfortunately, for both retirees and governments alike, data released by The World Economic Forum indicate that the global retirement funding shortfall gap is projected to grow annually by around 5%: 
- In Australia from $US 1 trillion (2015) to $US 9 trillion (2050)
- In the United Kingdom from $US 8 trillion (2015) to $US 33 trillion (2050)
- In the United States from $US 28 trillion (2015) to $US 137 trillion (2050)
In short, Governments are simply not equipped to support a looming ageing population, forcing retirees to find ways to support themselves one way or another.
Housing as an Asset Class
Futureproof’s recent submission to the Australian Royal Commission (which can be accessed here), details the critical need for a ‘fourth’ pillar of funding to support the shortfalls in superannuation, self-funded savings, and public pension schemes currently in place. Our answer is to employ the only remaining asset class that has the necessary depth of capital to make any real impact – home capital. Utilized through our soon to be launched, innovative financial instrument, The Equity Preservation Mortgage™ (EPM).
On average (between Australia, the U.K. and the U.S.) homeownership for individuals aged 65 and older is an encouraging 75%, with the unencumbered home capital in residential property (both primary residences and investment properties) estimated to be:
- $2.25 trillion in Australia
- $4 trillion in the U.K., and
- $14 trillion in the U.S.
Considering these figures alongside the fact that capital gain for home owners over the past 25 years (in Australia) has seen annual growth rates of 6.8% for houses and 5.9% for units. It is clear that this last remaining untapped asset provides a promising and accessible solution for retirees to fund aged care support.
Like any other asset class home equity must be considered in its ability to provide returns at an acceptable level of risk. However, we would argue that once an individual enters the retirement phase, the consideration of ‘acceptable risk’ must weigh more heavily of the two, as a retiree’s inability to contribute new funds via an income stream leaves them in a highly vulnerable position.
From 1988 to 2011 the U.S. residential real estate market produced a 3.20% compound annual rate of return (only roughly one-third that of the U.S. stock market). While not remarkable, by standard deviation return comparison, the residential real estate well out-performed its competitors by achieving results with a much lower level of volatility. The worst monthly return for residential real estate over a 5 year period (-2.79%) was considerably less compared to equities (-16.79%), commodities (-28.20%), or even bonds (-8.94%).
Where others have tried and failed
So far the only financial instrument (with any notable market up-take) that has attempted to utilize home capital as a funding solution has been, the Reverse Mortgage. It is crucial to note, however, that the Reverse Mortgage ‘solution’ does not provide sustainable access to the equity needed by retirees over a long-term, nor does it provide sufficient annuity income for a comfortable retirement. Through its inherently defective design, a Reverse Mortgage can actually be detrimental for most, as the accrual of compounding loan interest and the risk of negative equity can deplete a retiree’s home equity far too quickly. This equity depletion not only impacts retirees’ ability to establish generational wealth through passed homeownership, but also leaves retirees financially exposed at their most vulnerable period.
Where the Equity Preservation Mortgage™ (EPM) differs and excels is three-fold.
- Firstly, its ability to monetize a maximum of 80% of home equity into capital without equity depletion.
- Secondly, it is a fiscally responsible and sustainable solution being a fully-insured mortgage. The retiree carries no investment risk, no capital risk, no interest rate risk and no equity depletion risk. Acting instead as a financial instrument that leaves the family home as an appreciating asset whilst providing a long-term annuity income stream – tax free.
- Thirdly, on a broader scale, it provides massive new capital inflows directly injected into the global capital markets, through mortgage lending, asset management and RMBS securitization.
While there is undoubtedly an urgent need to address the growing hole in retirement and aged care funding, at Futureproof we believe it is fundamental that any solution must be fiscally responsible for current retirees and sustainable enough (via preservation of inter-generational wealth transfer), if we want to achieve the same long term and positive results for future retirees. Through the Equity Preservation Mortgage™ retirees will be able to achieve both intergenerational wealth protection, while opting to stay comfortably in their homes for longer, and with access to income and funding for their retirement and aged care needs.
For policy-makers, financial institutions and other stakeholders worldwide, the best practice financial solution is finally presenting itself. It couldn’t be timelier.
 https://www.statista.com/statistics/1036066/homeownership-rate-by-age-usa/ and https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/ageing/articles/livinglonger/changesinhousingtenureovertime#:~:text=Almost%20three%2Dquarters%20(74%25),in%201993%20(Figure%201).