Housing expert Mark Skelsey explains the pitfalls of the Pension Loans Scheme.
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 Pension Loans Scheme, which came into effect on 1 July, allows retirees to access a fortnightly amount representing 150 per cent of the maximum Age 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 sold.
The Government expanded the scheme by making it available to self-funded retirees as well as pension recipients and increasing the amount that 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.
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 Liveable Housing Australia standards, which include requirements for level pathways to the front door, easy-access shower cubicles, slip-resistant flooring and electrical power points 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 per cent of survey respondents said they had a spare bedroom available in their home which no one regularly occupied. Incredibly, one in five respondents said they had three spare bedrooms and four out of 10 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 that 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 per cent) Australians feel lonely for at least one day in a week, while more than one in four (27.6 per cent) feel lonely for three or more days. The UK Government has 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 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 over 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 PLS 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 that 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 PLS 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, 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 that 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 YourLifeChoices found that 87 per cent of seniors would not borrow through the PLS, 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.
Would you access the Pension Loans Scheme? What do you think are the major problems with this scheme? How could it be fixed?
Mark Skelsey is the news editor of leading retirement and downsizing property search portal Downsizing.com.au. He was a senior journalist at Sydney's Daily Telegraph and has worked as a media and communications consultant and executive in government and the private sector.
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
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