In this episode of In Focus, Heartland Seniors Finance chief executive Andrew Ford gives listeners the rundown on reverse mortgages and how these products are giving consumers more power over their financial futures.
Tune in as Mr Ford reveals why a lack of awareness about reverse mortgages is their only true competitor, why he’s seen an increase in consumer demand as banks pull back from this space, and his advice for brokers looking to connect with this demographic and add to their business.
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James Mitchell: Hello and welcome to another episode of In Focus. I'm your host, James Mitchell, from The Adviser. In Focus is a podcast which we do on a semi-regular basis, where we basically dive into themes and topics, and also profile people in the mortgage industry, who are making moves, and doing things which would be of interest to mortgage brokers, and to our audience. As always we've got our regular co-host, Annie Kane. How you doing Annie?
Annie Kane: I am really well, thank you James. How are you?
James Mitchell: Very good, thank you, and we've got Andrew Ford, the CEO of Heartland Seniors Finance in the studio with us. How are you doing, Andrew?
Andrew Ford: Good, thanks James.
James Mitchell: So, I wanted to keep the discussion based around reverse mortgages today. Maybe start off by telling us, for any of those brokers out there listening who may not understand fully what a Reverse mortgage is, and how it differs from, say an equity release, something like that? And maybe could give them a bit of a rundown?
Andrew Ford: Yeah, very good. Well, look. A reverse mortgage is actually very similar to a regular mortgage, except that it's been designed specifically for seniors, with no repayments due until the borrower leaves their home, so it differs from other forms of equity release, such as downsizing, where the senior sells their property, or a reversion scheme where they sell a portion of the home, in that reverse mortgage is they continue to own their home, and benefit from any capital gains, and continue to live there for as long as they choose.
James Mitchell: How long have you guys been working with brokers? What's the sort of, I guess, flow in terms of the business you get through third party, and that that comes direct? What's the makeup at the moment?
Andrew Ford: Yeah, roughly 70 per cent of our business comes from brokers.
James Mitchell: Okay, wow.
Andrew Ford: Heartland Seniors Finance was established in 2004, and brokers are a key part of our distribution, and an area that is growing really quickly.
James Mitchell: Yeah, in the recent weeks or even months, it looks like... Because reverse mortgage is a product which a lot of the major banks have often... Macquarie, and quite a few of the big groups have offered for some time... but it looks like they've either ditched it, or they've pulled back significantly.
Annie Kane: Yeah, Westpac recently did with their Senior Access Finance. They pulled that back, yeah.
James Mitchell: So, what does that mean for groups like yourself? In terms of the big guys pulling back, and is it more opportunity for you to get across brokers and that sort of stuff?
Andrew Ford: Yeah, I think it does create more opportunities for us. First of all Heartland Seniors Finance is a reverse mortgage specialist. That's all we do, so we're focused, all of our team are focused on reverse mortgages. We believe we've got the best product of a market, and that's demonstrated by rewards from Canstar and Money Magazine, so we've got the best product, and then because that's all we do we've got the best service as well.
I'd say in terms of competition, whilst changes in the market, with the likes of Westpac being mentioned and Macquarie, they are competitors, but in a sense our biggest competition is actually lack of awareness and apathy. The change from those competitors exiting probably does create us an opportunity with brokers who look up their panels and see that Westpac offers this or see's that St. George or Macquarie… It means that they have to look for another provider, and because we've got the best product and the best service, they're coming to us. But by and large, the opportunity here's well beyond competitors exiting, because of the demographics and the demand out there is growing so quickly.
Annie Kane: I think it's interesting that they have been exiting from this sort of senior finance. It's not something that we've really spoken a lot about, I think, in The Adviser but I think it's obviously something that people need and want. The demand, as you say, is there. Why do you think that the banks would be pulling back from this and why is Heartland providing [a solution in] this gap? What was it that drew Heartland to reverse mortgages in the first place?
Andrew Ford: First of all, in terms of our view is… So Heartland Seniors Finance, you see, is financed by its own bank called Heartland Bank, which history stretches back to 1875. Heartland Bank, which is listed in New Zealand Stock Exchange, is focused on operating in niche areas that the major banks are not as focused on so list, less contested areas, and reverse mortgages fit that perfectly for us. So we're very focused on what we see as a big opportunity.
In terms of the decisions of some competitors to exit, it's difficult for me to speculate. I guess, first of all, it's not that material for them in their overall scheme for things, whereas as I've said for Heartland, this is all we do in Australia. What we do, day in and day out, is whilst some of the loan sizes might be a little bit modest and lack some of the size of traditional mortgages, the impact it has on the customers can be truly transformational, so we like to think that we're helping customers and seniors live a bit of retirement every day. That is quite transformational for them.
James Mitchell: In terms of, I guess, the demographic changes or dynamics that are happening in the Australian market right now, you've got this ageing population happening, you know. There's a whole, big generation of people who bought their property 20, 30 years ago. They've either paid off their mortgage, or they're just, you know… They're in a mature phase, and they're either looking to downsize and go into apartment, or they're looking to go into assisted living, or they're making plans, you know? I've even got friends and family who are looking at this. They're sitting on a decent-sized family home and they wonder, should they sell it? Should they rent it out? Should they put a granny flat in the back and get some cash flow? All this sort of stuff. But very few of them are mentioning reverse mortgage. I guess it comes back to the awareness piece.
Why do you think there's, I guess, a fundamental disconnect between this big generational shift and demographic shift happening in Australia, and a product like reverse mortgage, which would match that perfectly, but there seems to be a lack of awareness. Why is there a lack of awareness?
Andrew Ford: There's a number of factors there. First of all, in terms of reverse mortgages, there were some poorly developed and poorly sold products in the past. I think that's largely been addressed. I think from a regulatory perspective, reverse mortgages are probably the most heavily regulated consumer financial product in the market.
James Mitchell: Yeah.
Andrew Ford: So that's been addressed by the providers and improving their products. Heartland has invested considerably in enhancing and improving our product, and continues to make developments in that area to make it more flexible and more dynamic for our customers’ needs, so there is that stigma attached to it. Then you've got both kind of emotional and financial decisions driving what someone wants to do in retirement. So, the great thing is, for someone like the cases you're mentioning, they've got options, and downsizing can be a perfectly viable option, and reverse mortgage could be as well. We just want people to be aware of it as an option, because in terms of emotional perspective, some people find that their family home is what connects them to their community, and it's what provides them with independence and security, and with friends and family, so having the option to stay in their family home and release some equity to improve their retirement can make a real big difference to them.
In terms of why there's that lack of awareness out there, I think because it hasn't really been a focus for many providers, no one has really invested in promoting it out there. What Heartland worked at doing is we've really focused online and providing educational out there. We're also are reaching out to brokers and asking them to help us with the awareness side of things, because when we do talk to brokers, most of them come to us with a story, like you have, saying: "Oh, this would be perfect for so and so. We know someone that knows us." We know that most brokers, reverse mortgages will only be a small part of their business, but it will help them to diversify and grow their business. They'll probably have contacts with an existing customer base, or a referral from the existing networks that they have that will be perfect for reverse mortgages to be considered as an option.
Annie Kane: Just talking about that sort of clientele, I wonder if you could just give us an outline of sort of what the typical Heartland Senior Finance customer looks like. Who is actually taking out these products? Then secondly, how brokers can find these customers.
Andrew Ford: Yeah, very good. So our typical customer has changed a bit in the last 10 years. What we're finding is the demographics, it's not just an ageing population. That takes quite a while to flow through. That's a percent a year type thing. What the bigger change is, is probably the increasing house prices, increasing home values, and increasing indebtedness going along with that and increasing equity at the same time.
Annie Kane: Yup.
Andrew Ford: Someone might have retired 15 years ago with a $500,000 home, with no debt. Now they've got a million dollar home and they might have a $100,000 dollar mortgage. They're saying: "Okay, what do I do? Do I downsize?" Downsizing from a million dollar home, once you take into account lots of costs involved in that, in clearing that mortgage, may not provide them the property that they do want to live in. So they're coming to us to refinance that debt, so that they can actually retire without the ongoing payments.
The other use is still the number one use, is home renovations and improvements, travel, medical expenses, age care costs, debt consolidation: not just the mortgage, but they might have been spending on their credit cards and personal loans, motor vehicle finance, et cetera. That's what they use the money for, and add in there, just taking the stress out of every day bills. We're seeing a lot of people, particularly where I flown up from this morning, Melbourne, where it is very expensive to turn the heater on every night, and you need it in Melbourne, so that's cost. The increasing cost really eats into when you're living off a pension.
So that's what people are using it for. We've seen a real increase in demand over the last couple of years. That's flowing through to a level of new business we're seeing. For brokers, we have come across opportunities, because most brokers, more and more, have an online presence and they've also got a really good network of referrals, so what they're seeing is some of the really excellent brokers coming across customers that they helped 10, 20 years ago, and that are now entering retirement or are considering retirement, and need some financial advice. The broker is a really trusted person for them.
They've also got referral networks, and sometimes, we're seeing first home buyers that are using their parents to support them, but to get on to that property ladder, they need more support than maybe they'd envisaged. So, releasing a little bit of equity from their parents’ home whilst they still retain ownership of it, it doesn't provide a guarantee, because they're just effectively providing a little bit of a deposit to help their children or grandchildren. That can be really useful as well. So there's lots of opportunities out there. It's just a matter of turning the mind to it, really.
James Mitchell: That's really interesting with the intergenerational transfer of wealth stuff. I would never really have thought of that aspect of reverse mortgage, you know, releasing a bit of equity, and giving it to your kids so they can get into market. Let's say there’s some broker listening, and they're keen to get it across this more, and they want to, I guess, get accredited or upskill, and that sort of thing. What are the next steps they need to take? Let's say, you know, they're with an aggregator, but they want to start at least looking into reverse mortgages with the potential to offer them. Is it an advised product? What's the accreditation process like? How does it go?
Andrew Ford: Well, it looks so a broker to promote reverse mortgage must have a credit licence, so that provides brokers with an immediate, instant advantage in this area. With Heartland, it's really simple. We provide all the training accreditation, and we can be as hands-on or hands-off as the broker would like. So we provide them the training material, a short accreditation, and then the tools to go up there and promote it to existing customers. We take care of all of that, and the broker then can bring us applications, and we will fulfil that and keep them informed through it.
We've got strong digital online presence. We have a broker portal, which provides real-time access to existing customers with Heartland Seniors Finance and applications in progress so they can see how that goes, and all the training material and everything that goes there. There's no need to be... There was a requirement from some providers to be accredited by Sequal -
James Mitchell: Yup, that's right.
Andrew Ford: ...or by another training institution. With Heartland, we do all that training ourselves.
Annie Kane: I think it's interesting as well what you were saying there about actually having a change in the clientele basically in the last 10 years, and obviously, as you mentioned with the record-high levels of indebtedness in Australia as well, is it always going to be seniors that are taking out... Obviously, it's Heartland Seniors Finance, but is it always seniors that take out reverse mortgages, or are there applications for people maybe just wanting to sort of downsize, for example?
Andrew Ford: Well, look for our product it's very flexible. It works for anyone that’s 60 or over. I'd say most people in their ‘60s and even early ‘70s wouldn't consider themselves seniors.
Annie Kane: Yeah, probably.
Andrew Ford: We actually thought long and hard about having that in there.
Annie Kane: In the autumn of their lives.
Andrew Ford: In the outside. Look even not there. It's people in their retirement. It's not just that people are living longer. They're living for longer. They want to do more. They're more active retirees. We get great feedback from customers. You've seen those postcards from doing an African safari in the Serengeti and from doing... It's not just no longer doing a cruise around the Pacific islands, which might be fantastic. It could be taking the grandkids to the Gold Coast.
Annie Kane: Right.
Andrew Ford: They're much more active, but interestingly, you asked earlier on the average customer. Our average age of a new borrower is still the same as it has been for about the last 10 years. It's about 72 years old, so what they tend to have done is retired for about 5 to 10 years and eaten into their superannuation and other savings, and then they've incurred possibly a little debt, and they're wondering how they're going to carry on for the next 10 years. They're sitting there at 72 and going: "Well, I'm not done yet. I want to go skiing, or I want to go on holiday," or "Actually, I do need a new motor vehicle. I still want to be independent, and I want to have that peace of mind that I can go to the supermarket, or I can get the power bill, and it won't put a lot of stress on me."
Annie Kane: Yup.
Andrew Ford: What we try and do is take people, provide them with peace of mind. Whilst the age is about the same, the average borrowing has increase quite a bit. The reason for that is probably more and more refinancing of debt, debt consolidation, and also, age care costs. We have a product called an Age Care loan. You have a cost to get into an age care facility, which has increased quite considerably, and so that has increased the average level of our average borrowing.
But from a broker's perspective, whilst the line is smaller than a regular mortgage, and that will likely always be the case, the loan's a little bit different from a broker's perspective in that it grows over time, because there's no payments required (although our product is very flexible, allows payments partially or in full at any time without penalty). But the loan does grow all the time. It also tends to have an average term of somewhere between eight and 10 years, so it's a very sticky loan, stays on the books and grows over time.
From a broker's perspective, incredibly low maintenance once you write it. You know, you put it on the books, and yeah, from time to time, you might stay in touch with the customer, but we look after the customer the whole way through, and the trail commission obviously continues to grow, because the loan grows.
Annie Kane: Just in terms of the types of properties that you can get reverse mortgage on, is it just on free-standing houses, or does that cover flats? Like, what are the sort of properties that you can actually...
Andrew Ford: At Heartland Seniors Finance, we can lend to anywhere in Australia where there's a deep property market, so that's pretty much all capital cities and all major regional centres. We'll look at properties on a case-by-case basis, but all free-standing houses, most units, most apartments over 50-square metres. We do require evaluation to be done. Provided the evaluation doesn't raise any alarm bells, we can support most of Australia.
Like a typical lender, we lend to about 95 per cent of the Australian population, but only cover about 5 per cent of land area.
Annie Kane: Yeah.
James Mitchell: Is there any particular areas around the country, or any types of securities where you've seen more demand for this sort of product?
Andrew Ford: By dollar value, it's very much aligned with Sydney and Melbourne, you know, house prices increases there, but by number, it's roughly in line with the population, so we see demand right across Australia. You know, it is some areas that are high retirement areas, that some of the New South Wales and Southeast Queensland are a little bit higher, but we see this as a product that is good for right across Australia where seniors want to retire where they live.
As I mentioned earlier, it's what connects them to their community. It's where their friends and family are. It might be the local bowls club. It might be the supermarkets there. It might be that they're living in a really nice house in Sydney, and they want to stay there for another five years as a transition. Five more years: the grandkids like the pool, they're happy to do the grounds and the gardening for five more years, and it's worth... you know, it could be a couple of million dollars. Just releasing a $100,000 dollars, plus an extra $20,000 a year would transform their lives and enable them to stay there.
By the time that they've sold... Look, anyone who's taken a reverse mortgage in Melbourne or Sydney in the last 10 years, their house value's increased considerably, and reverse mortgage has gone up with interest, but nowhere near to the same extent, that the equity would have well and truly grown.
Annie Kane: No, it sounds like a win/win all around really, a no-brainer.
Andrew Ford: Well, the great thing about reverse mortgages, and that's why the team at Heartland Seniors Finance and myself are so passionate about it, is we deal with so many happy clients, and that's what the brokers that do it as well, because you really are helping someone. It is a financial product that genuinely helps people live a better life. You really are transforming their lives. And whilst the amount might be relatively modest initially, it does make a big difference to them.
As I said, it takes them on a journey from, sometimes a sense of fear or failure (because it's a big decision for a senior, and that's why we make sure it's a really informed decision, and we work really hard around that education piece), but we take them on that journey from fear or fail to peace of mind. That's really fantastic. We get a lot of positive feedback from our customers and from our brokers and so forth.
James Mitchell: That's a really interesting point, in terms of the customer satisfaction, that end-user satisfaction at the moment. Particularly with the regulatory stuff changing in terms of the broker, at the moment, and a few things sort of on the cards and that sort of stuff when it comes to how you actually identify a good customer outcome. You know what I mean?
I know in the banking space, they're sort of going off a more customer satisfaction based score card now when it comes to the end result. It looks like there's been some suggestions to integrate that into broking as well, so I can see how it would be a natural fit in terms of the way the future of the industry is going, in terms of how you measure how happy your customers are, I guess.
Andrew Ford: The regulators, quite rightly, are really focused on consumer outcomes. I think financial services sector, as a whole, needs to be, and look -for reverse mortgages at Heartland Seniors Finance - our outcomes are fantastic. That's a really neat aspect of the business and the role, and for our brokers out there, that you really do help someone improve their retirement, and live a really good retirement, also.
Annie Kane: And give them money when they most need it.
Andrew Ford: Yeah. I think also, from a broker's perspective, with some of the changes you're mentioning, James, in terms of regulation, there is a greater acknowledgement now that brokers do need to diversify their business to grow it, and to survive in an increasingly complex world. So to have a product like a reverse mortgage will enable them to grow their business, to diversify it, and ultimately expand the business, have multiple income streams, so I think it really makes sense for brokers.
What we've seen in the last years, our broker numbers have more than doubled, and a lot of it's just inquiry to us, coming to us saying: "Okay, I've come across this opportunity. What do we do about it now?" Then, because we're willing to help the broker through the journey, because for most of them, it's their first reverse mortgage, we can help them through that, and they find the experience really easy. Then, like I said, it's really low maintenance once they have the customer on board.
James Mitchell: Excellent. Well, I think that's just about all we've got time for, Andrew, but thanks very much for taking the time. We'll have to maybe get some of the brokers that you work with into the studio for Elite Broker. They could talk us through how they're brought into their offering, and then what they're finding with customers. That would be really interesting.
Yeah, so that's all we've got time for this week on In Focus, but do join us next time. I've been your host, James Mitchell, and of course, for all the latest news, insight, and analysis, do check out theadviser.com.au. Catch you next time.
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