APRA’s capital treatment of reverse mortgages and shared equity mortgages

APRA has announced the following capital treatment for reverse mortgages (where principal and interest payments are not required until termination of the facility, which is not fixed and normally occurs when nominated residents die, vacate the mortgaged property or the property is sold):

  • a 50 per cent risk-weight will apply for reverse mortgages with LVRs of 60 per cent or less and a 100 per cent risk-weight for reverse mortgages with LVRs above 60 per cent and up to 100 per cent;
  • where the LVR rises above 100 per cent, the exposure should be treated as impaired.

In order to receive a risk-weight of less than 100 per cent, the lending and other relevant criteria set out in Attachment C of APS 112 must be met. In all cases where a risk-weight of less than 100 per cent has been assigned, the reverse mortgage must continue to comply with the relevant criteria at all future times. If any of the criteria is breached at any time, the exposure will immediately attract a 100 per cent risk-weighting.

As APRA considers that shared equity mortgages (where both the lender and borrower share in any gain or loss in the value of the mortgaged property) are similar to direct investments in property a 100 per cent risk-weight is applicable.

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