Retirees may require more than the Age Pension to live comfortably in their older years, and the Australian Federal Budget 2018's expansion of the Pension Loans Scheme makes a reverse mortgage more appealing. However, is it really worth contemplating?
Chief executive of COTA
The most recent federal budget included a dramatic expansion of access to the Pension Loans Scheme to Australians over pension age, and increased the maximum fortnightly income that can be drawn from the loan. Full pensioners will be able to borrow extra income from the government of up to 50 per cent of the Age Pension, and part pensioners can borrow up to 150 per cent.
The total will be dependent on the value of your home and is recoverable from your estate.
COTA supports this development because it means people can borrow to pay for their share of Home Care Package costs, for example, or to top up a high-level package. It can also be put towards the daily fee in a residential aged-care home, or just to pay for help around the house.
You only withdraw as much income as you need, and the interest rate is lower than commercial products, but higher than a normal mortgage. A similar scheme was proposed by the Productivity Commission in its 2011 aged-care report.
“Full pensioners will be able to borrow extra income from the government of up to 50 per cent of the Age Pension.” Ian Yates
This is an innovative alternative to the traditional reverse mortgage, which involves taking out a significant-sized loan against your home, with the interest also being paid from the equity in the home. These have not been very popular. There are some other products available, such as selling a portion of your home to a financial institution, or having a line of credit that you can use as you wish, secured against your home equity. In Australia, the availability of the products is limited and they are relatively expensive.
Louise Kloot FCPA
Business and education consultant
There are two forms of reverse mortgage – borrowing money using the equity in your home as security, or selling a share in your property. The first is the more common form and is quite straightforward, as you know how much you must pay back, which is the initial loan plus interest. The second can be trickier, especially if there is a capital gains tax, which must be shared.
Due to our welfare system, you may have a very valuable house but also be living on a pension. If you can access some equity in the house, you can pay for repairs to the property, go on a holiday or pay for day-to-day living expenses.
Another option is to downsize, but you will have to pay stamp duty and sales commission. There are also emotional costs of moving out of a house that you may have lived in for 30 or 40 years. A reverse mortgage may help overcome this.
If you consider a reverse mortgage, be sure to get specialist advice. The federal government introduced a scheme several years ago where you are no longer required to pay more than the value of your house upon sale, but if the property market stagnates, you could end up with the whole value going to the finance provider when you sell.
“If you consider a reverse mortgage be sure to get specialist advice.” Louise Kloot FCPA
If you are on a pension or part pension, you can borrow from Centrelink, but if you go outside the Centrelink system and take the reverse mortgage in a lump sum, it may affect your pension. The safest bet is to always get specialist advice.
Senior industry analyst at IBISWorld
A reverse mortgage is a useful tool for those wishing to unlock some of the equity in their property. At the same time, it is a complex financial tool that can trap unsuspecting individuals, locking them into unfavourable plans. Repayments and products fees are generally capitalised on the loan, so no repayments are required on the principal or interest while you are in the house.
When you sell, move (generally to a retirement home) or pass away, the loan and associated fees are repaid from the proceeds of the sale.
The risks associated with reverse mortgages can be significant and difficult to understand. While you don’t have to pay fees while you are in the house, the amount of equity you control can quickly decline. Interest rates are generally higher than average mortgages, and the effects of compound interest can quickly chisel away at any value you had in the home.
Essentially, all your equity in the property can be at risk. For instance, over a 30-year period, the amount owed on a reverse mortgage can expand by almost 2000 per cent. Reverse mortgages can also significantly impact your ability to pay for future aged-care needs, as well as your pension eligibility.
“The risks associated with reverse mortgages can be significant and difficult to understand.” William McGregor
It’s not all doom and gloom, though. You can make repayments on the loan at any time, which means you can effectively regain control of your equity. A reverse mortgage can also give individuals the ability to spend money locked away in equity in the later stages of their life, without having to sell their property.
Pensions - the $1.6m transfer balance cap (recorded webinar). This recorded webinar focuses on the Government’s changes to the pension rules coming into effect on 1 July 2017.
Ian Yates is chief executive of COTA Australia, the national peak body for COTAs in each state and territory. COTA has more 1000 organisational members representing over 500,000 senior citizens, plus 30,000 individual members. Yates also serves on a range of government and aged-care sector national bodies, including the federal government’s Aged Care Financing Authority, the Aged Care Sector Committee, the Aged Care Quality Advisory Council and ASIC’s Consumer Advisory Panel. He holds a BA from Flinders University and is an honorary doctor and emeritus deputy chancellor of Flinders University. Yates was awarded membership in the Order of Australia (AM) in June 2005.
Professor Louise Kloot FCPA
Professor Kloot has extensive experience in corporate governance, audit and risk management, strategic planning, management and finance. She has been and is a non-executive director of several boards and is a former head of the departments of accounting at Swinburne and Victoria universities, director of quality assurance for Swinburne’s Malaysian campus, and associate dean research at Swinburne. She has also held the role of head of business at MIT. Professor Kloot is deputy chair of CPA Australia’s Third Age Network, which advocates for the interests of retired or semi-retired members.
William McGregor is a senior industry analyst at IBISWorld. He has researched and written about a wide range of industries in Australia and New Zealand encompassing retail, financial and insurance services, transport and logistics, defence and real-estate services. McGregor is also part of the media team, and is industry client queries coordinator for IBISWorld Australia.
Reverse mortgages can be useful, but take care