Tapping into the equity in your home can deliver some welcome extra funds, writes actuary John De Ravin, but is the strategy right for you?
Retired actuary and author John De Ravin knows a thing or three about personal finance and insurance. Acknowledging that our retirement income system can be complex, he explains the key financial strategies that can help pre-retirees and retirees in his book, Slow and Steady: 100 wealth building strategies for all ages. In this chapter, ‘Sell some equity in your home’, he takes us step by step through the strategy so you can decide if it will work for you.
Read this strategy if:
- you are retired and own your own home with little or no mortgage and you would like to boost the amount of cash you have available for spending
- if you are on a part Age Pension, the Pension Loans Scheme does not meet your needs
- you are not keen on a reverse mortgage because you want to be sure that a certain percentage of the equity in your property will still belong to your estate, no matter how old you are when you pass away.
You could extract some money from your home to meet living expenses with a reverse mortgage. But one of the issues in doing this is that when you take one out you are not quite sure whether there will be any equity left in your home when you sell it. Some homeowners might want to be sure there will be some equity left for their beneficiaries, when they pass away.
Australians have an alternative way of tapping into the equity in their family homes to provide additional funds for current living expenses, or to meet urgent one-off expenses. You can sell a percentage interest (say 50 per cent) in your home to a financier, and receive a discounted value of that interest. When you sell your home, or when you pass away, the lender is entitled to the agreed percentage of the sale proceeds of your home. You receive only a discounted value of the share in your home’s value though, because:
1. the acquirer is not entitled to receive any rental income from the property and
2. the acquirer is not permitted to sell your home to recover their money until you decide you want to sell (or you and any surviving spouse pass away). The younger you are, the higher the discount because the sale of your property and payment of the share to the acquirer may not occur for a very long time.
This form of tapping into the equity in your home is known as a ‘home reversion scheme’ or sometimes as ‘home equity release’. More detail about home reversion schemes is provided in an article on the ASIC MoneySmart website.
How to do it
In Australia at the time of drafting, there is only one percentage equity acquirer, namely HomeSafe Solutions Pty Ltd, a company partly owned by the Bendigo and Adelaide Bank. Moreover, HomeSafe Solutions is only interested in acquiring a percentage interest in properties in specific postcodes in Melbourne and Sydney. As a matter of policy, HomeSafe will not purchase an interest in your property in excess of 65 per cent.
If you are considering a home reversion, you can go to the HomeSafe website and check eligibility. At the date of drafting, the criteria were as follows:
- homeowners who are at least 60 years of age in Victoria, or at least 55 years of age in New South Wales (where at least one homeowner in NSW is at least 60 years of age), at the date of contract with HomeSafe
- homes within eligible postcode areas. HomeSafe currently covers approximately 90 per cent of metropolitan Melbourne and Sydney postcodes
- homes that are freestanding, or if a unit or strata property, there are no more than six dwellings on the title plan (excludes apartments)
- the property is the principal place of residence for at least one homeowner at the time of exchange of contracts
- the land value of the property is 60 per cent or greater of the total market value of the home as determined by an Independent HomeSafe panel valuer
- all permanent residents in the home are shown as property owners (or have an interest) on the certificate of title or can be added as required
- homeowners have no debt on their title or all existing mortgages can be discharged before, or at the time HomeSafe contracts with homeowners.
If you are eligible, you can click on the ‘Check your eligibility’ button, fill in the online form that pops up, and HomeSafe will contact you to discuss your inquiry.
What does it mean for you financially?
Essentially, the consequences of a home reversion are that you will receive money from the acquirer (HomeSafe) now and can do whatever you want with it. There are no constraints on how you use your home; you can even move out and rent out your property, if you wish. You do not have to sell your home when you move into aged care (though you might need to sell your home if you are trying to assemble an accommodation deposit, so you can enter the aged care home of your choice).
Of course, the consequences are borne by your beneficiaries in the sense that when you pass away or whenever you choose to sell your home, HomeSafe will be entitled to the agreed share of the sale proceeds.
Unlike the situation with a reverse mortgage, where it is impossible to know in advance what percentage of the equity in your home will remain after you have paid off the loan, you always know what percentage of the proceeds of selling your home you (or your estate) will be entitled to on sale: it is simply 100 per cent less the share that you have sold to HomeSafe. However, no-one is in a position to know the dollar amount that will go to HomeSafe until the property is finally sold.
Factors to take into account before you decide
There are three factors you should consider before proceeding with a home reversion contract.
First, depending on what you intend to do with the proceeds, if you are a full or part age pensioner there may be implications for the amount of Age Pension you will receive. If, for example, you hold the proceeds of the home reversion as financial assets, those assets will be subject to the assets test and also the assets will be subject to ‘deeming’ for the purposes of the income test. If you are a part pensioner, the amount of pension to which you will be entitled is likely to be affected. If you are a full pensioner and the amount you receive from the home reversion is sufficient to breach the minimum threshold for the assets test or the income test, you will lose at least part of your pension. You should check with Centrelink on the likely outcome for your pension entitlement.
Second, the home reversion decision has implications for your estate, since only a proportion of the proceeds of the sale of your home will fall to your estate. (Also, of course, you can’t leave your home to one of your beneficiaries because after you and your spouse have passed away, under the terms of the contract, the home will have to be sold so that HomeSafe can be paid their share of the sale proceeds.) So, if you are considering using a home reversion scheme, it is worth discussing your intentions with your beneficiaries.
Finally, it is worth considering the situation that may arise later in life in the event that you can no longer look after yourself and you need to go into an aged care facility. If you have used the value of your home towards your current consumption, will selling the remainder provide you with a sufficient lump sum to fund your aged care accommodation deposit?
Slow and Steady is available from John De Ravin’s website for $39.95.
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Financial 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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