At first glance, it seems like a good idea – introduce an Australian Government program which allows retirees to increase their pension by unlocking the equity in their home.
The expanded Pensions Loans Scheme announced as part of last week’s Budget will allow pensioners to increase their income by up to $17,787 per year. Under the scheme, the government will charge 5.25 per cent interest on this income and will recover the loan amount when the pensioner’s home is eventually sold.
But there are many problems with this scheme, which means it is unlikely to be a viable solution for many of Australia’s rising numbers of ‘asset rich cash poor’ pensioners. At best, the scheme may offer a temporary solution, allowing pensioners time to make longer term decisions without being forced into a "fire sale" situation.
Private sector may be able to do this better
It’s always dangerous when governments enter the home loan game, even though it may sound attractive at a time when banks and financial institutions are getting a lot of bad press.
Seniors in NSW may remember the HomeFund debacle in the early 1990s, where the NSW Government loaned money to people – especially low-income earners - to buy a home.
People were then trapped in a scheme which was charging interest rates up to 16 per cent, at a time when house prices were falling and unemployment was rising. Public meetings were held across the State, but particularly in Western Sydney, from people wanting the scheme amended (which of course it was).
There’s a similar potential problem lurking here.
There are already existing providers of reverse mortgage schemes, namely the Commonwealth Bank and HomeSafe. While the proposed 5.25 per cent rate from the government is currently below the Commonwealth’s rate of 6.3 per cent, who’s to say the private sector won’t be able to provide a better rate or scheme in the future?
At which stage, the people sitting on the government scheme will rise up in anger – complaining they have been ‘ripped off’ and using the democratic processes to seek further taxpayer subsidies.
In short, government is strongest when it oversees the private sector, but doesn’t become a player in it.
Doesn’t promote ‘fit for purpose’ housing for seniors
Many pensioners are living in older-style homes, which were designed for active and young families. These homes are less suitable for elderly people.
This government decision will encourage pensioners to stay longer in unsuitable homes, when we should be providing incentives for them to move to newer and safer housing stock.
A better approach may be to allow pensioners to keep, or even increase, the pension if they unlock the equity in their home and downsize into a ready-made retirement village or seniors housing project.
This would have added benefit of stimulating the economy through increased housing production, along with freeing up potentially millions of empty bedrooms across the country.
The former Rudd Government proposed a scheme like this in the 2013-14 budget. Under this scheme, downsizers would have been able to keep up to $200,000 of the value of their sold home out of the pension assets test.
However, the incoming Abbott Government scrapped this measure just one year later in Joe Hockey’s famous austerity 2014-15 budget, citing budgetary pressures. It is time to reconsider this scheme.
It could be a waste of time and money
The Productivity Commission looked closely at the government’s role in equity release schemes as part of its 2015 inquiry into Housing Decisions of Older Australians.
This included looking at the Pension Loans Scheme, which has been in place since 1986 but as of 2014 was overseeing just 800 loans across the nation.
The Commission concluded the government should stay out of reverse mortgages, apart from potentially publicising more information about them and considering a lighter-touch regulatory approach. The reason? Well, according to the Commission, no-one was interested in them and government intervention could distort the market.
The Commission concluded: “It may be most prudent for governments to accept that there is currently little interest among older Australians in making use of financial equity release products. At most, government intervention in the private equity release market should likely be limited to information provision. Any further measures would require a careful consideration of all costs and distortions that might arise.”
One suspects there is some truth to the Commission’s analysis, given that the Australian Budget estimates it will spend just $11 million over five years to fund this scheme.
This scheme won’t help with housing affordability
It was only in last year’s budget that the Australian Government was encouraging retirees to sell the family home, not to stay in it, as part of a new initiative to drive housing affordability.
It announced incentives for retirees to sell the family home, downsize into a new home and put some of the money left over into their superannuation. This scheme will come into place on 1 July.
One of the key arguments in favour of this approach was that it would help release more large family homes around the suburbs back into the market, therefore driving down costs.
A year later and it is taking the exact opposite approach – encouraging pensioners to stay in the family home, which presumably then leads to a reduction in housing affordability.
It could lead to loneliness
As mentioned above, there are millions of empty bedrooms in homes occupied by elderly people across Australia. These bedrooms are empty for a very good reason – the family (and sometimes also a partner) are no longer living there. This can be a very lonely experience and also not a safe one during times of ill-health. Many older people remain in a large family home alone for too long and suffer from increasing social isolation and depression.
There’s a strong case for encouraging elderly people to move into retirement communities or other purpose built accommodation, where they can get better social and health support in their golden years.
Scheme doesn’t help people with large mortgages
This scheme also doesn’t help the increasing numbers of seniors who are arriving into retirement with a large mortgage and are struggling with repayments.
The Housing Decisions of Older Australians report by the Productivity Commission, shows that around 30 per cent of Australians aged more than 55 in 2011 had an outstanding mortgage on their home, compared to around 15 per cent in 2001. You would imagine this trend has continued since 2011, due to increasing property prices.
Unlocking equity doesn’t really help here – the mortgage payments are likely to eat up the increased income. The best way to deal with this problem may be to sell the property to allow the mortgage to be removed.
There is no question that government intervention is required to help support ‘asset rich cash poor’ retirees to fund living expenses in later years.
The government’s reverse mortgage scheme may offer a helpful temporary solution for some people. This could be after a sudden financial change, ill-health or the death of a partner, or while pensioners are transitioning into alternative accommodation.
But in the longer-term, it is unlikely to be the best solution. In fact, it could encourage people to stay in large unsuitable homes and be isolated from a supportive community, while at the same time being in a scheme which may not be in their best financial interests.
An alternative way forward would involve government providing incentives for retirees to unlock equity by selling the family home and downsizing into a more suitable property.
These incentives could include changes to the pensions asset test, increasing housing supply for retirees and stamp duty reductions or waivers.
Amanda Graham is the Co-Founder and Co-CEO of Downsizing.com.au and Seniors Housing Online, Australia’s dedicated real estate listings website for downsizing-friendly properties.