Josh Funder

Household Capital, an independent, specialist retirement funding provider, and ME Bank, an industry super fund-owned Australian bank, have announced a partnership establishing a $100 million wholesale debt facility.

The terms of the facility are innovative and designed to meet the major unmet financial needs of Australian retirees who plan to continue living at home.

ME Bank holds a minority equity stake in Household Capital.

Needs-based finance innovation

Australians are living longer but many do not have enough super savings to provide sufficient income throughout retirement.

“Retirees want to stay at home, but many are struggling to make ends meet as they age,” said Josh Funder, Managing Director of Household Capital. “Our goal is to deliver a values-based service to help Australian retirees Live Well At Home.

“We fill the gap left by the banks and offer flexible solutions for retirees to meet their retirement funding needs from a combination of superannuation, the savings in their home and their Age Pension.”

This Household Loan is designed to meet the needs of Australian retirees by allowing them to balance their savings, continue to grow their assets during retirement, and harvest a sustainable income from their investments.

Home equity supports a wide range of needs

Household Capital provides Australian home owners access to additional retirement funds by using a low interest rate loan to transfer a portion of the value of their homes into their superannuation fund or an investment account.

Home equity can also be used to fund in-home care and support the transition to aged care. This approach also enables the transfer of home equity between generations to fund first-home buyers’ deposits and educational expenses.

“Household Capital has expanded access to home equity, improved the customer experience and established new sources of finance,” said Jamie McPhee, Chief Executive Officer of ME Bank.

“We are pleased to work with such an innovative group to transform the lives of Australian retirees.”

Lowest available rate

Household Capital and ME Bank’s innovative approach to wholesale funding and building strategic partnerships means Household Capital can offer Australia’s lowest available rate to retirees needing to access their home equity.

“Our approach is more efficient and specific to the needs of retired Australians,” said Mr Funder.

“This enables Household Capital to mitigate risk when it’s occurred and offer retirees a significantly lower rate.

“Traditional bank reverse mortgages charged around 6.4%. Since the banks withdrew from providing access to home equity for Australian retirees, many remaining providers have increased their rates even higher.

“Working with ME Bank to deliver more efficient and responsible access to home equity, we are able to provide a rate of 5.9%.”

Withdrawal of the banks

Traditional bank reverse mortgages were not always aligned with the long-term housing and income needs of Australian retirees and did not provide genuine retirement funding adequacy and certainty.

Overall the reverse mortgage market in Australia remained static at around 35,000 outstanding loans and up to a $3.5 billion portfolio for the past decade before entering a decline associated with the withdrawal of bank providers. The end of 2018 saw the last of the bank reverse mortgage providers close their books, with both Commonwealth Bank and BankWest ceasing to write new business.

“The banks have pulled out, however nearly one trillion dollars of home equity savings owned by retirees remain potentially available, yet largely inaccessible, to support improved retirement incomes,” commented Nick Sherry, Chairman of Household Capital.

“We provide responsible and flexible access to lifetime savings, allowing retirees to make sound, longer-term economic and lifestyle choices.”

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Sally Bruce

Australia’s most recognised regional banks have called on a major competition inquiry to level the playing field and put consumers and the economy first.

In a joint submission lodged with the Productivity Commission, AMP Bank, Bank of Queensland, Bendigo and Adelaide Bank, ME Bank and Suncorp highlighted five key areas that require policy reform to achieve sustainable competition and competitive neutrality:

1. Further policy reform to reduce the artificial funding cost advantages enjoyed by the major banks. While the new Major Bank Levy has reduced this advantage, it only recoups a small proportion of the overall credit rating uplift enjoyed by the majors;
2. Further reform of risk weights to address the significant gap that still exists between the capital requirements of the major banks and standardised banks. While there has been some risk weight narrowing following the FSI, the gap remains significant, and is particularly stark for loans with the lowest risk;
3. A review of macro-prudential rules to better balance macro outcomes such as stability, without undermining banking competition. One option would be for APRA to give greater policy weight to minimum capital requirements. Macroprudential rules set by APRA have effectively ‘locked-in’ market share of loan books at current levels, thus leaving smaller banks with no room to challenge the already dominant position of major banks;
4. Mortgage aggregators and brokers owned by major banks should publicly report on the proportion of loans they direct to their owners. While we do not suggest that major banks should be banned from owning broker networks, we do believe that where this occurs it should be managed in an open and transparent way to ensure customers are able to make fully informed decisions; and
5. Before any new regulations are introduced, greater consideration should be given to the impacts on smaller banks. The unprecedented pace and volume of new regulation and compliance has a disproportionate impact on smaller banks which stifles sustainable competition.

The banks also support the ABA’s submission calling for more care and attention into the shadow banking sector, which continues to compete free of many regulations and APRA oversight.

The CEOs said while Australia had been well served by a strong and highly regulated banking sector, it was important that stability did not overshadow competition and good consumer outcomes.

Suncorp Banking & Wealth CEO David Carter said: “We believe there can be a balanced and fair framework allowing banks of all sizes to compete on a level playing field, while still meeting all sound, prudential principles. We would like to see more attention on macro-prudential rules to promote customer choice and competitive pricing, as opposed to maintaining the status quo – which is in effect similar to the ‘yellow flag’ being waved at the Grand Prix, where all drivers are then prohibited from overtaking one another.”

ME CEO Jamie McPhee said: “Regulatory imbalances have allowed a small group of banks to dominate the Australian market. Reform is needed if we want to create a fairer banking system so smaller banks can compete. A more competitive banking system is about improving customer choice and promoting economic growth.”

AMP Bank Group Executive Sally Bruce said: “Access to cheaper funding plus lower capital requirements for like-for-like loans gives the big banks a huge advantage over smaller players. Combined with the blanket approach to compliance and macro-prudential limits, we have a system of issues which impede competition and the best outcomes for customers. We are at risk of keeping big banks big and small banks small unless we address.”

The CEOs said improving competitive neutrality will deliver better customer outcomes and drive greater innovation in the sector.

“A strong banking system is good for all Australians and smaller banks bring vital competition and choice to the market,” they said.

“While the market is competitive today, it is vital this competition is fair, productive and sustainable.

“The bottom-line test must be: what is good for customers is good for the economy.”

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