Rising life expectancies combined with increasing house prices and cost of living pressures means that more retirees are finding themselves asset rich and cash flow poor.
A simple solution can be to downsize, freeing up capital to invest and repaying any debt to reduce expenses. For those who don’t want to downsize (and those who have already downsized) the next thing that often comes to mind is a reverse mortgage.
Following the banking Royal Commission in 2019 many of the big lenders have stopped providing reverse mortgages, although a number of smaller lenders are still offering these loans.
Over the last few years the government have expanded what was known as the Pension Loans Scheme, it is now called the “Home Equity Access Scheme”.
What is the Home Equity Access Scheme
The Home Equity Access Scheme is effectively a government reverse mortgage that enables people to borrow a regular fortnightly payment of up to 150% of the Age Pension. For self-funded retirees it is possible to borrow the whole 150% of the pension, while for people receiving the full Age Pension they maximum loan is 50 per cent of the pension.
Since 1 July you can choose to take an advance payment of your loan as a lump sum, or a combination of lump sum and fortnightly payment. The maximum amount you can take as a lump sum is capped at 50% of the annual rate of Age Pension. If you choose to take a lump sum it reduces the fortnightly loan amount over the next 12 months.
If you are thinking about using the Home Equity Access Scheme you are going to need meet certain criteria.
- You (or your partner) will need to be at least 66.5 years old (Age Pension age) and meet the criteria to receive Age Pension, Disability Support Pension or Carer Payment – you don’t need to receive one of these payments, i.e., your payment may be zero because your assets or income are too high, you just need to be eligible.
- You (or your partner) will need to own property in Australia that can used as security for the loan. The property can be the home you live in or an investment property. It can be owned by you or your partner as individuals, by a trust or company that you are a stakeholder of or co-owned with others. Obviously, all owners would need to agree to the loan and in the case of a trust or company a guarantee will be needed. You can also use multiple properties to secure the loan. The property/ies you use must be adequately insured and you will need to meet any costs associated with the registering of the charge or caveat and having it removed when the loan is repaid.
Your age and the value of the property being used as security determine the maximum loan amount.
If you have a partner then the age used is based on the youngest person. There is a nominated age component for each year of age between 55 (or younger) at which the age component is $1,710 and 90 (or older) at which it is $6,750. The age component applies to each $10,000 of the property value (rounded down).
For example, if the property value that was being borrowed against was $307,000 then it would be rounded down to $300,000. If the youngest borrower was 50 then the maximum loan amount would be $51,300 and if they were 90 it would be $202,500. Once you reach the maximum loan amount you cannot borrow any more money through the Home Equity Access Scheme.
Just like a reverse mortgage from a bank, interest is charged on payments through the Home Equity Access Scheme, currently the rate 3.95%p.a. The interest is compounded fortnightly based on your loan balance.
Compound interest is your best friend in savings and your worst enemy in debt, let’s look at how it works for the Home Equity Access Scheme.
Let’s say you borrow $750 per fortnight, you get $750 now and in a fortnight’s time that amount will be $751.14 then the next payment of $750 gets added to that so your loan balance is $1,501.14 and then interest is charged on the loan balance, so the total amount owing is $1,503.42. Now, fast forward that when the loan has been running for 10 years and the amount owing is $239,269.71 of which $195,000 is the fortnightly payments you have received and $44,269.71 is the accrued interest.
Figures from Services Australia show that the popularity of the Home Equity Access Scheme is growing. Three years ago there was 768 borrowers while at June 30 this year that number had jumped to 6,041 owing a combined debt of $138 million.
If you are thinking about borrowing, whether it is through the government’s Home Equity Access Scheme or another equity release loan you should seek specialist advice.
These loans can have serious implications for your estate planning wishes and, on your ability, to fund your next move, whether that’s to downsize or moving into aged care.
*The information contained in this article is general in nature and does not take into account any person’s individual objectives, financial situation or needs. It is not intended to imply any recommendation, opinion or advice. You should seek advice from a qualified professional about your particular financial situation, needs and objectives.