Paul's Insights: Options for home equity worth exploring
A number of lenders have bailed out of reverse mortgages, a product that lets over-65s borrow against the value of their home to generate extra income.
With lenders like the Commonwealth Bank and Bankwest jumping ship, seniors looking for a reverse mortgage are left with a choice of just IMB, Heartland Seniors’ Finance, and P&N Bank.
However, other strategies to harness home equity are available.
The Pension Loans Scheme (PLS) run through the Department of Human Services, works in a similar way to reverse mortgages. Your home equity acts as security for the loan, and the amount borrowed is repaid when you sell up or pass away.
Right now, the PLS is only available to age pension recipients, and the payment received is a top-up to the maximum pension payment. That’s about to change.
The government has just passed a Bill, which from 1 July 2019 will see the PLS become open to all retirees including self-funded retirees, with the maximum payment worth 150% of the full age pension.
At present the PLS comes with an interest rate is 5.25%. This compares favourably to commercial reverse mortgage rates. P&N Bank’s loan for example, comes a rate of 6.24%.
Lump sum payments aren’t available through the PLS, but it’s still a welcome opportunity for seniors to increase their regular income.
Another option for older Australians is downsizing their home to take advantage of the new downsizer super contribution. A couple aged 65-plus can make combined contributions of up to $600,000 using proceeds from the sale of their home.
All of these choices can mean leaving a smaller estate. The MoneySmart website has a calculator that shows the possible impact on home equity of taking out a reverse mortgage. But after years of paying off and maintaining a home, it seems only fair that older Australians should be allowed to use their equity to fund a decent lifestyle rather than focusing on what they can leave for their adult children.
The possibility of using home equity is also far more palatable than throwing money into a dodgy ‘get rich quick’ scheme in a desperate bid to generate some extra cash. The latest investment scam report from consumer watchdog, the ACCC, shows that older Australians are more exposed to scams, and often wear some of the biggest losses.
The main point is that as we age, every legitimate resource is worth looking into. After years of service providing a roof over your head, your home could be a financial lifeline in retirement.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
A reverse mortgage allows seniors over 65 to borrow against the value of their home to generate extra income. This can be a helpful financial tool for retirees looking to supplement their income without having to sell their home.
As of now, the lenders offering reverse mortgages in Australia include IMB, Heartland Seniors’ Finance, and P&N Bank, following the exit of Commonwealth Bank and Bankwest from this market.
The Pension Loans Scheme (PLS) is similar to a reverse mortgage in that it allows retirees to use their home equity as security for a loan. However, the PLS is run by the Department of Human Services and offers a lower interest rate of 5.25% compared to commercial reverse mortgage rates.
Currently, the PLS is available to age pension recipients, but from 1 July 2019, it will be open to all retirees, including self-funded retirees. The maximum payment will be worth 150% of the full age pension.
No, the Pension Loans Scheme (PLS) does not offer lump sum payments. It provides a regular income top-up, which can be a valuable resource for retirees looking to increase their regular income.
The downsizer super contribution allows Australians aged 65 and over to make a one-time contribution to their superannuation of up to $300,000 per person, or $600,000 per couple, using proceeds from the sale of their home. This can be a strategic way to boost retirement savings.
Using home equity through options like reverse mortgages or the PLS can reduce the size of the estate left to heirs. However, it allows retirees to enjoy a better quality of life in retirement, which many consider a fair trade-off after years of homeownership.
As retirees age, exploring legitimate financial resources like home equity is crucial to avoid falling prey to scams. The ACCC reports that older Australians are more vulnerable to scams, making it important to use trusted financial tools to secure a stable retirement income.
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