Affordable Housing: Home equity release choices
THERE are three main options for older Australians wanting to release equity in their home; reverse mortgages, the Pension Loans Scheme and shared sales proceeds arrangements.
The most commonly used option is a reverse mortgage.
- A person, generally aged 60 and over, can access their home equity.
- The lender takes a mortgage over the property.
- The minimum amount is usually $10,000, and a maximum is set usually based on the lender's age.
- The loan can be received as a lump sum, a regular payment or sit ready to be drawn down when required.
- It only needs to be repaid once a trigger event occurs, such as the sale of the house, the breach in the contract or the death of the borrower.
- Interest is charged and compounded monthly, over the period of the loan.
- Loans can have either fixed or variable interest rates.
- A No Negative Equity Guarantee is in place so that the loan, regardless of its length or the movement in interest rates, will not exceed the value of the home.
- If the loan is taken out by a couple and one of them dies, it will stay with the surviving partner.
- Most providers will allow for top up amounts or further borrowing, depending on the lenders borrowing margins.
- Some providers will allow for the loan to be used for the payment of an aged care accommodation deposit.
National Seniors Financial Information Desk manager, Craig Hall, explained the concept behind this type of loan is to give people who own a house, but are income poor, help to get them through costs such as daily living expenses or cover a major one-off expense.
"It's important for the borrower to understand how much of the asset will likely be passed onto the provider upon repayment," Mr Hall said.
"Projections must be given to the borrower to give them an understanding about what equity will remain after so many years (of the loan), and they have to use the MoneySmart calculator on the ASIC website."
Mr Hall said legal advice is mandatory to ensure the borrower knows the terms and conditions of the loan.
"We also suggest a person seeks independent financial advice as they can advise on whether the loan will affect a person's Aged Pension and will it impact on provisions for aged care, for example."
There is also one provider that has launched a loan product which, subject to the retirement village allowing for it, means a person could take out a reverse mortgage on their village contract.
Pension Loans Scheme
- This is a government scheme.
- It's available for people who aren't on an Aged Pension or are on a part-pension.
- It's based on the what amount of equity is offered, how much is to be kept back and the age of the borrower.
- The government takes out security over the home.
- It will then top up the aged pension to the maximum amount per fortnight.
- That amount, which becomes the loan amount, and with interest, would accrue.
- The current interest rate is 5.25%.
- The full loan amount would then be repaid at the time of a trigger event. It can also be repaid, in part or in full, at any time prior to a trigger event.
"For example, if the full pension is $500 per week and if I am eligible for an Aged Pension at $300 per week, I could say I want the full pension.," Mr Hall said.
"The $200 difference forms part of the Pension Loans Scheme and that's the part that accrues interest over time."
A borrower should note that they can access the loan if they are of age person age and because they aren't eligible for a payment or only for reduced payment rate because of the assets or income tests, but not both.
Full details on the loans are available from www.humanservices.gov.au/customer/services/centrelink/pension-loans-scheme.
The advantage of a reverse mortgage is that it's likely more money can be borrowed or a lump sum borrowed for a major expense.
Shared Sales Proceeds Arrangements
- It's called Homesafe and is only offered by Bendigo Bank.
- Contracts can only be made for properties located in metropolitan Sydney and Melbourne.
- There is no interest charged on the loan.
- A home owner can access a lump sum by selling a share of the future sale proceeds of their home. So, when the property is sold, the owner forfeits some of the home equity as the loan provider takes an agreed percentage of the sale proceeds.
- There are eligibility requirements such as the minimum age is 60.
Of these three equity release options, the reverse mortgage has the most flexibility.
"The reverse mortgage has been around for the longest," Mr Hall said.
"They had a bit of a bad name in the late 2000s until the industry started to clean itself up a bit. Since then they are more user friendly and quite flexible.
"If you have other resources such as term deposits, it's generally a no-brainer that you would be better off using those first.
"For those who don't have other resources behind them, their house is something they can tap into."