PensionReforms' summary and comments
Retirees often have illiquid assets (like their homes) that they want to continue using in retirement, or simply don't want to sell.  An 'equity release product' can give the owners access to cash (to spend in retirement) while allowing them to use the asset.  An Australian government agency has looked at what's available and has issued some warnings.

Equity release arrangements may have to last for many years (until death or infirmity forces a sale) so because the transaction is normally complex and the fine print often opaque, the risks to buyers (not just the retired) are significant.  They are also principally aimed at what the report calls "the underfunded aged and aspiring first home buyers", a potentially vulnerable group.

The report looks at three different products available in Australia - 'reverse mortgages', 'home reversion schemes' (sale and lease and sale and mortgage models) and 'shared appreciation mortgages'.  The first of these was the most popular (in 2005) but the amounts lent were only a small fraction of total house lending (only 0.14% of the overall value of all loans in March 2005).  The industry then saw much future potential for growth.

The international experience (UK, US and New Zealand) with these is also summarised.

The potential market amongst retirees is significant in Australia:
".according to the Australian Bureau of Statistics, approximately 89% of Australian couples and 72% of singles over the age of 65 own their homes outright."  By that, PensionReforms assumes the report means, with no debt.

The report's overall recommendations:
".internationally each of the three types of products discussed in this paper have, at times, been criticised because they have been missold to consumers, who have suffered considerable detriment as a result. We consider that equity release products are complex and that most consumers will need advice to determine whether any of the range of products are suitable to their needs and, if so, which one. The products will often need to be considered within broader financial plans, particularly given the tax and social security issues and the potential to use equity as source of funds for investment. And consumers will also need advice on the detail of product features, terms and conditions, and their rights and responsibilities in the particular product they are considering."

The report urges potential users of equity release products to get ". independent legal and financial advice to ensure that they fully understand the terms and consequences of any arrangements they enter into."

There is a useful list of specific issues consumers need to take into account with each of the three products looked at and notes that the Australian regulatory regime ".was not designed to address the issues raised by equity release products, which take the form of a credit arrangement but nevertheless have some of the attributes of an investment product."

Consumers seemingly aren't given full disclosure of risk or costs; nor seemingly is there proper oversight of the investment aspects of the products; nor are the distributors properly trained or tested as to competency.  To PensionReforms, that sounds like a fairly comprehensive list of failings.

Needless to say, the report (from a regulator) suggests that:
"Federal, state and territory regulators monitor closely the development of the market, consumer complaints and any problems they point to and keep under review the adequacy of the regulatory structure to address them."

The agency will also help by undertaking research, monitoring complaints, "..initiating consumer education and "[w]orking with industry and State and Territory governments to enforce existing legislation and further develop industry best practice."

PensionReforms notes that financial products are not the only way for retirees (and others) to get access to cash by drawing on existing assets.  Taking in boarders, subdivision of part of the land or trading down to a less expensive property are 'do it yourself' options that may be less expensive and more appropriate than a product offered by a financial service provider.  Moving to a retirement village with associated medical services may also be another way of making long term provision for possible periods of infirmity. (File size 273KB; 51 pp) 336