Our no-nonsense financial planner Maurice Patane answers Shirley’s questions about unlocking the equity in her home.
I am thinking of unlocking the equity in our home to help a little along our way. I am 63 and my bubby is 61. We own our home. How do we go about this? Our bank will only do this if one of us is 65 yrs. And is it a good idea in the first place?
A. Have you heard the term, ‘asset rich and income poor’? Like many people, it appears most of your wealth is tied up in your home, and the age pension is not enough to fund your lifestyle.
Most people tend to think of borrowing from the bank when they purchase their first home. In fact, there are many stages of life where you may borrow from the bank and retirement is one of them. However, the purpose is to obtain funds to support your lifestyle. We refer to this as a reverse mortgage.
In this case, the bank will provide you with a loan, which you can take either as a lump sum, a regular amount, or both. Think of it as a large credit card. However, the difference is that you don’t make direct loan repayments. Instead, the interest (at competitive rates) on the loan amount is added to the amount borrowed – up to a limit of course.
But wait, there’s more. You don’t need to repay the loan until you die (sorry to be so blunt), sell or vacate the home.
Imagine the difference between a modest lifestyle and a comfortable lifestyle, or to allow you to live in your home for longer. For some that are wealthier, it may even be the happiness and peace of mind of being able to assist your children with an early inheritance.
So let’s understand the impact on your age pension and how you can be smart about how to use a reverse mortgage.
Let’s say you have determined that an additional $1,000 each month will provide you with a more comfortable lifestyle. You don’t want to sell your home because it’s close to family and friends and you like your children and grandchildren to visit.
So you discuss your options with your adviser and borrow $150,000 against your home. Wait a minute, what if I need to sell the home and I can’t repay the loan? Well the bank won’t lend you any more than 40%, so there is some room for flexibility.
You could receive the $150,000 as a lump sum in your bank account, but that will be assessed against the assets test and be deemed against the income test, which may impact on your age pension payments.
I prefer that you receive the $150,000 through a drip-feed facility, by receiving a regular cash payment of $1,000 each month over a number of years. There are many reasons for this, but let’s consider three of them. Firstly, you are less tempted to spend all of the money at once and importantly it will ensure you retain good money behaviours. It is also an add-on to your existing age pension.
Secondly, you only pay interest on the amount you have withdrawn. Interest on $1,000 is far less than interest on $150,000. In fact, unless you are quite prudent with how you invest the $150,000, it would need to earn well above the interest cost. I don’t see a need to take unnecessary risks at this stage of your life.
And finally, there is no impact on your age pension. The amount not withdrawn will not be assessed under the assets test. As the regular monthly cash payments of $1,000 are low and being used immediately, they will not be assessed under the income test.
Now all your friends will notice how much happier you are.
Maurice Patane has been a financial planner for over 25 years. His experience has shown him that many Australians are not living the lives they dream of or wish for, which is often due to poor financial decision-making. Maurice is dedicated to helping everyday Australians take control of their financial future, so that they no longer have to worry about money.
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