22 July 2019
At first glance, it seems like a good idea – supercharge an existing Australian Government scheme to make it easier for retirees to turn the equity in their home into regular cash payments.
The expanded Pensions Loans Scheme, which came into effect on 1 July 2019, allows retirees to access a fortnightly amount representing 150 per cent of the maximum pension payment, via a government loan secured against their home.
A 5.25 per cent interest rate will apply to the loan, which will need to be paid back to the government when the home is eventually sold.
The government expanded the scheme by making it available to self-funded retirees as well as pension recipients and increasing the amount which could be borrowed from 100 per cent to 150 per cent of the maximum fortnightly pension rate.
The scheme does look particularly attractive in a low interest rate environment, where retirees are struggling to create a strong and safe income stream from their savings.
However, retirees will need to think carefully before they sign up to the scheme, as it does have a number of potential pitfalls. We’ve laid them out for you here:
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, often because they contain stairs, trip hazards and don’t cater for people with reduced mobility.
This government scheme will encourage pensioners to stay in these unsuitable homes, when it is perhaps preferable to be providing incentives for them to move to newer, safer and more comfortable housing stock.
For instance, many newer homes are built to Livable Housing Australia standards, which includes requirements for level pathways to the front door, easy-access shower cubicles, slip-resistant flooring and electrical powerpoints elevated from the skirting board.
This scheme won’t help with housing affordability
Across Australia, there are estimated to be millions of empty bedrooms, largely due to ‘empty nesters’ living in homes well after the children have left home. These bedrooms are going to waste when they could be providing housing for those who need it.
A survey by Downsizing.com.au and LJ Hooker in 2017 revealed the extent of the problem.
Just under 90% of survey respondents said they had a spare bedroom available in their current home which no-one regularly occupies. Incredibly, one in five respondents said they had three spare bedrooms and four out of ten said they had two spare bedrooms.
Encouraging pensioners to stay in their home will continue and exacerbate this national empty bedrooms problem, by locking up older, larger homes which could be better occupied by younger and growing families.
It could lead to loneliness
Like many other developed countries, Australia has an acute loneliness problem. A major study released last year found one in two (50.5%) Australians feel lonely for at least one day in a week, while more than one in four (27.6%) feel lonely for three or more days. The UK Government has even launched its own Loneliness Strategy, arguing that it is one of the greatest public health challenges of our time.
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.
Retirees may be better moving into retirement communities, where they can be part of a vibrant and supportive community, rather than utilising the Pension Loans Scheme and staying alone in their homes.
Scheme doesn’t help people with large mortgages
This scheme also may not 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.
Recent economic data has shown this problem has worsened since 2011.
Although it is possible to utilise the Pension Loans Scheme when there is an existing mortgage on the property, this may not be the best solution.
This is particularly the case if the ongoing mortgage payments eat up the increased income which will come from the scheme.
The best way to deal with this problem may be to sell the property to allow the mortgage to be removed, or to find other ways to get rid of the mortgage debt.
Using the scheme for a long period could cut into your home value
The Pension Loans Scheme is based on a 5.25 per cent interest rate, that compounds fortnightly on the outstanding loan balance.
As the government’s website explains, this means that if you use the loan to get a fortnightly payment of $750, after 15 years you will have a total loan balance of $445,000 (of which some $152,000 represents interest).
That sort of amount is likely to represent a pretty big whack on any inheritance which goes to the children.
As AMP Technical Strategy Manager John Perri explains: “When the family home is sold, the amount owed will be deducted from the sale price of the home.”
“For retirees the Pensioners Loan Scheme provides an opportunity to free up some equity that they have in their home. This may help bridge the funding gap while looking to secure aged care or while they await an ACAT assessment.
“The downside is that their estate often will be left to pay the outstanding loan, potentially leaving less inheritance to the kids. Retirees should carefully consider their personal situation to work out if this is a viable option for them.”
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 may not be the best solution.
In fact, it could encourage people to stay in large unsuitable homes and be increasingly housebound, lonely and socially isolated, while at the same time being in a scheme which may eat into the inheritance they want to give their children or doesn’t help them remove an unwanted mortgage.
The early evidence is that seniors are not convinced about the scheme. A recent survey by website YourLifeChoices found that 87 per cent of seniors would not borrow through the Pension Loans Scheme, compared to 13 per cent who would.
To this end, it would be helpful if the Federal and State Governments offered incentives for retirees to unlock equity by selling the family home and downsizing into a more suitable property. This would help retirees to access funds from their property, and at the same time enjoy the many benefits of downsizing.
These incentives could include changes to the pensions asset test, increasing housing supply for retirees and stamp duty reductions or waivers.
By Mark Skelsey - Email Mark at [email protected]