Home-owning pensioners struggling to fund the retirement they want have been thrown a lifeline courtesy of the Federal Budget 2018 – almost all retirees will be able to access a reverse mortgage, with the Government as the lender.
Under the expanded Pension Loans Scheme, Australians of retirement age will be able to top up their entitlements, regardless of whether they are part or full pension recipients.
Previously, only part age pensioners were able to access these funds and then only to the extent that they equalled a full Age Pension.
However, from 1 July 2019, the Government will increase the maximum allowable combined payment to 150 per cent of the Age Pension rate.
That means full-rate pensioners will be able to increase their yearly income by $11,799 and couples will be able to receive an extra $17,787 on top of the Age Pension.
Policy think tank the Centre for Independent Studies (CIS) has championed the extension of the loan scheme saying that it will help to boost the quality of life of many asset-rich but cash-poor seniors.
“It’s a really good idea and an opportunity that will improve retirement standards for many older Australians,” according to Simon Cowan, CIS research manager.
“I am surprised there weren’t more people taking advantage of the scheme before it was widened. I believe fewer than 800 of the 1.8 million pensioners who own homes were accessing their equity.
This reverse mortgage scheme deserves to be taken up by more pensioners, especially those who are living in an expensive house but do not have enough cash to spend on those things they need,” Mr Cowan told YourLifeChoices.
CIS estimates that retired Australians are sitting on $750 billion worth of untapped home equity and do not want to sell or take out a loan because they want to leave their asset to their children.
“What these pensioners may not be factoring in is that if they take up a modest pension loan for 20 or so years, by the time it comes to selling the house, the rise in property values would have outstripped the size of the loan that needs to be paid back. So in a sense, there will still be something to leave behind for the next generation,” he said.
“As far as I am aware, the top-up from a loan will not affect other pension entitlements, so long as the money is spent and not hoarded.
“Also, the way the mortgage is structured guarantees that over time, a pensioner cannot borrow more than what their house is worth. That is, they cannot leave a debt behind for someone else to pay.”
While the loans will be secured against a pensioner’s home, the amounts borrowed do not have to be paid back until the property is sold. Although if a recipient’s circumstances change, they may pay the loan back sooner.
The borrowings cannot be a lump sum as funds must be paid with the fortnightly pension. Amounts borrowed are non-taxable and will attract an interest rate of 5.25 per cent. This is one percentage point cheaper than reverse mortgages on the market and considerably less than the lowest interest rate for a personal loan of 7.65 per cent, according to comparison site Canstar.
While the maximum any retiree can claim is 150 per cent of a full Age Pension, individuals will have limits on how much they can borrow depending on their age, how long they intend to receive payments, whether they are single or have a partner, the value of the home and how much Age Pension they receive.
In one case study provided with the Budget papers, a single pensioner takes out a loan that boosts her fortnightly payments from $908 to $1135. Over the 20-year term of the loan, the pensioner has received an extra $170,000 in payments and accrued a debt of $300,000 including interest. However, her house has appreciated in value from $400,000 to $750,000. When the house is sold, $450,000 stays in the estate.
Would you consider taking out a pension loan to top up your payments? Would you prefer to continue living frugally so that you can pass on a debt-free home to your children? Do you think that the Federal Government should play the mortgage market this way?