Government reverse mortgage expanded
Among the goodies for older Australians, the 2018 federal budget beefs up a little-known government program to help retirees tap into home equity to boost their incomes.
The government sees the expansion of the Pension Loans Scheme, which is similar to a reverse mortgage, as part of the solution to helping older Australians financially.
The Pension Loans Scheme has existed for about 30 years, but is little known and little used. A Productivity Commission report in 2010 said there were only 710 loans outstanding.
Reverse mortgages can help with living expenses, but they erode your equity in your home over time.
Reverse mortgages allow home owners to exchange equity in their homes for a loan that is repaid from the proceeds when the home is sold. They can be a good way for those who are asset rich but income poor to free up some money from the house without having to downsize, with all the associated cost and hassle.
The Pension Loan Scheme offers a number of advantages over private reverse mortgages, but is limited in scope. Currently the scheme is limited to borrowing an amount to top up the part pension to the equivalent of the full pension.
From July 1 next year, the scheme will be broadened to allow people to borrow to create an income stream 50 per cent higher than the full pension (including supplements). That means up to $17,800 a year extra for a couple on the full pension or $11,800 for a single on the full pension. The government also plans to open the scheme to all those of pension age, whether they be full pensioners, part pensioners and self-funded retirees.
The advantages include the interest rate of 5.25 per cent. While that is more than a typical repayment-based home loan, it is about one percentage point less than most reverse mortgages offered by the private sector.
Another advantage is the fees. With private providers there is an establishment fee of about $1000 and monthly account fees. There no fees with the government scheme, apart from any legal fees.
Finally, income from the Pension Loans Scheme will not affect Centrelink benefits such as the age pension. Private reverse mortgages can affect the pension because of the income test from either an income stream or deeming rates applied to a lump sum.
The Pension Loans Scheme is administered by the Department of Human Services, which applies age-based limits to the amounts that can be borrowed so retirees will not wind up owing more to the government than their house is worth. The security for the government scheme is usually the family home, but an investment property can be used as security instead.
However, there are drawbacks for borrowers too.
Private reverse mortgage providers generally allow those over 60 who own their homes outright to borrow a lump sum or an income stream. Most home owners prefer to take the money as a lump sum; though, some retirees draw-down the money as needed up to their credit limit.
Under the government scheme, the money can only be borrowed as an income stream and not as a lump sum.
As with any reverse mortgage, there are no repayments on the loan until the property is sold or the borrowers die, so the interest is capitalised. This means you pay interest on interest – and the higher the rate and the longer the term of the loan, the less that is left over when the house is sold or is left to the estate.
Beware, over time, the interest mounts up and eats away into the home-owners’ remaining equity and limits the ability to downsize or move.
The inheritance issue may not be too much of a problem, with seniors’ attitudes changing from previous generations. Fewer than half of over 50-year-olds say they are just as likely to provide an inheritance as their parents, while more than one in three say they’re less likely.
Fewer than two in three respondents in the over-50 age group told the survey they have a responsibility to provide for their children’s future, while one in five said it was not important to leave an inheritance for their children.
Increasing longevity no doubt plays a role in this and people are factoring in the need to plan and pay for a longer, and possibly more exciting, retirement than their parents had.
There are only four commercial providers – Commonwealth Bank and its subsidiary BankWest, Heartland and P&N Bank – offering reverse mortgages, according to Canstar.
There’s also another product called an equity release scheme – the main one is Bendigo Bank’s Homesafe Wealth Release. The bank takes a fixed equity stake in the home and its share does not rise over time in percentage terms, but it benefits from any rise in the value of the property.
Homesafe is limited to certain postcodes in Sydney and Melbourne, and excludes most apartments. There are fees associated with it.
The income from the scheme could be used not only to meet living expenses, but to pay for services such as private home care while waiting for government funding.
As to how the expanded pension loan scheme could work, the example of a couple, Tony and Laura, who are full age pensioners living in a home they own.
Tony had been approved by the Aged Care Assessment Scheme (ACAT) to receive a home care package and is on the waiting list for allocation of a package.
He has been told to expect at least a nine-month wait. They only have a small amount of money in their bank account and cannot afford to pay for private care services while waiting for a government-subsidised Home Care Package.
However, with the expansion of the Pension Loans Scheme, the couple will be eligible to borrow up to 150 per cent of the full couple pension rate, including supplements, or about $17,800 per year.
When Tony receives his Home Care Package, they can choose to stop or reduce the pension loan amounts if his home package provides sufficient support to help him remain safely in the home.
Other measures in the budget designed to help retirees include the Pension Work Bonus – the amount of income that can be earned before affecting the pension – which will be increased to $300 a fortnight from $250 a fortnight, or an extra $1300 a year.
And, for the first time, the bonus will be extended to those who are on the age pension and are working not for an employer, but for themselves.
This article is for your information only.
Please seek professional financial planning and retirement advice prior to exploring any mortgage, loan or other borrowings endevours.
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