The Australian government’s reverse mortgage program – also known as the Pension Loans Scheme (PLS) – has grown five-fold since its inception two years ago as more Australian retirees look for new ways to facilitate cash flow in retirement while they are space in their existing homes. This emerges from a story recently published by the Sydney Morning Herald.

“At the end of fiscal year 2018/19, only 768 people had accessed the program, but by the end of March of this year their number rose to 4039,” writes reporter John Collett.

The Australian government is currently being described as “conservatively managed” and will soon impose something called a “no negative equity guarantee” on the PLS, which appears to work in a similar way to the non-recourse function that is part of most American variants of a reverse mortgage loan, including the ubiquitous Home Equity Conversion Mortgage (HECM) program administered by the Federal Housing Administration (FHA).

The maximum amount of cash that can be accessed as part of the PLS is currently 150% of the Australian Government’s Full Retirement Pension and loan proceeds can currently only be distributed in a series of ongoing payouts. However, borrowers have access to a lump-sum payment model until the middle of the year – up to two capital advances over a period of 12 months, up to a total of 50% of the maximum annual rate of retirement pension – -2022.

It is not yet clear whether these new features, including both the flat-rate payment model and the “no negative equity guarantee,” will be made available retrospectively to existing borrowers or will only apply to new borrowers, reports Collett.

Access to lump sums could increase the potential appeal of the PLS to older Australians, according to Katja Hanewald, Hazel Bateman and Katie Sun of the University of New South Wales’ School of Risk and Actuarial Studies (UNSW), Collett says.

“This is because many retirees would like to make large purchases, such as a new car, do-it-yourselfers or repairs,” he writes on the basis of UNSW data. “The figures quoted by the scientists show that at the end of last year around two thirds of the PLS participants were full retirees, while the rest were partial retirees. The intake by self-financed pensioners is relatively low. “

However, the researchers also criticize one component of the PLS, including the variable interest rate of 4.5%, which they believe is too high, writes Collett.

“It’s lower than private-sector reverse mortgages, but significantly higher than the record-low interest rates on regular owner-occupier mortgages,” he writes.

At the end of last year, the reverse mortgage adoption rate in Australia had doubled, exceeding government expectations for the program introduced in the 2018-19 state budget.

Read the story in the Sydney Morning Herald.