Perceptions of the family home have changed dramatically in recent years.

Once viewed as a tool to ensure low housing costs in old age, a more complex and wide-ranging welfare role for home ownership has emerged. A suite of mortgage products are transforming the family home from “bricks and mortar” into a liquid resource that owners can dip into to meet spending needs when required.

The scale of equity borrowing activity has been immense in Australia, with the total value amounting to over two-thirds of the total flow of funds from housing into the cash economy during 2001-2008.

One in five Australian owners dipped into their housing equity every year over the last decade. Home owners, particularly those in retirement transition years, have continued to withdraw equity despite the global financial crisis.

Policy pressure

Interest in withdrawing home equity has in part been driven by fiscal policy responses to our ageing population. For example, the Productivity Commission recently recommended that home owners release equity to help pay for aged care needs.

But equity borrowing is used by home owners throughout their life, not just in old age. Financial innovations have turned the family home into an “ATM”, with borrowers drawing down their housing equity as and when they choose. And so the family home is being positioned at the centre of an asset based approach to the management of lifetime welfare.

Tapping home equity can bring immense financial benefits to home owners, especially baby boomers who have reaped huge windfall gains from rising house prices across the millennium. Now approaching or in retirement, the majority are home owners. Equity borrowing could prolong their financial independence and promote “ageing in place” despite escalating age related costs such as health bills.

It can also enhance the intergenerational flow of financial benefits. For example, owner parents might roll out housing equity to help finance the education costs of children. What’s more, parents may use equity release to help fund their adult childrens’ first home deposits.

Real risks

But equity borrowing can also expose the owner to uncomfortable levels of risk, especially those who have reached or will shortly reach the end of their working careers.

Firstly, there’s the real danger of inadequate or inappropriate advice, due to the often complex nature of mortgage products.

Because equity borrowing involves additions to mortgage debt that have to be repaid in the future, borrowers also take on repayment risks. These risks are often precipitated by adverse life events such as divorce, ill-health or unemployment

Our research shows that equity borrowers approaching or in retirement (aged 45 years or over) have outstanding mortgages that are roughly 1.5 times the level owed by other similarly aged mortgagors. The drawdown of housing equity by ageing parents will also reduce bequests to adult children. Our research found this to be a source of friction that can fracture relationships between parents and children.

What’s required

Getting policy settings right is critical to help people tap their housing equity in secure ways. Misguided equity borrowing could result in growing numbers of home owners entering retirement with large outstanding mortgage debts.

Consumer understanding of equity borrowing products is essential to financially responsible management of housing wealth. Home owners cashing in housing equity should be made fully aware of the safeguards afforded to them under consumer protection laws. Currently, product disclosure details are invariably technically complex and obscure.

The intergenerational implications of equity borrowing cannot be ignored. The “great Australian dream” of owning a home is increasingly out of reach for young Australians, who have been dubbed “Generation rent”. However, those baby boomer parents that secured home ownership “careers” have reaped large windfall housing gains. A willingness to gift some of their gains to help children secure a foothold in home ownership could be the source of a growing rift among Generation rent. Home ownership prospects could come to depend more and more on parents’ housing wealth and their willingness to use equity borrowing products.

But is this growing reliance on equity borrowing products misplaced? We estimate that 642,000 individuals left home ownership between 2001 and 2010 and did not return by 2010. Many left because of financial difficulties, in part due to crippling mortgage repayments, but also precipitated by separation, divorce, ill-health and redundancy. Might it now be time for innovative mortgage products that help home buyers ride out these threats, by allowing them to swap investment returns on their home for lower housing costs?

There is a growing international interest in such financial products because they help home owners better cope with the risks that changing demographics and insecure employment conditions are inflating.

This is the second piece in our Housing 2020 series, exploring the major policy issues facing housing over the next five years. Click on the links below to read the other pieces.

Explainer: why negative gearing is bad policy

Aussie rules for overseas buyers won’t solve London’s housing bubble