You don’t have to choose between a roof over your head or the cash.
Asset-rich, cash-poor – it’s a refrain that is on the lips of many older Australians who either partly or fully own their homes. But they don’t have to choose between a roof over their head or the cash. There are ways that both can be had.
In 2015, a majority of people aged over 60 preferred to remain in the family home for as long as possible rather than downsize, according to the Productivity Commission survey, Housing Decisions of Older Australians.
A more recent survey of YourLifeChoices members found that if they were ever forced to downsize, most would choose a smaller home on their existing block of land.
Given the choice, 56 per cent of members said they would still want a detached home, according to the survey conducted in partnership with Ellivo Architects. And in another YourLifeChoices survey this month, a whopping 39 per cent said downsizing was their key strategy to supplement or stretch their retirement income.
It’s not yet clear if the superannuation incentives announced in the May Budget – due to take effect from 1 July – might persuade older Australians to change their attitudes to downsizing. These proposals would give retirees the opportunity to avoid paying tax on a non-concessional contribution into their super funds of up to $300,000, if they sold their home to buy a smaller one.
However, what may emerge is that an increasing number of older Australians who find themselves cash-strapped may not benefit a great deal from such an incentive if they still have a sizeable mortgage.
YourLifeChoices found that 17 per cent of respondents still owed money on a home loan. That is a steep jump from 2011 when 10 per cent of people aged over 65 had mortgages, according to the Australian Bureau of Statistics.
In the earlier Productivity Commission survey, 12 per cent said if they were desperate for money, they would dip into their property’s equity.
There are a number of ways to tap into the value of a family home, from subdividing a block and building a second house on it to reverse mortgages and home reversion schemes.
There are pros and cons for each.
Option 1: Reverse mortgage
Deloitte’s 2015 Reverse Mortgage Report estimated that Australian retirees had amassed $500 billion in home equity. About 40,000 had taken out around $3.6 billion in reverse mortgages to create a cash flow to fund their needs.
The typical reverse mortgage was for around $92,000 and the average age of the borrower was 75.
These types of mortgages, which are available only to those aged 65 and over, are a loan against your home with proceeds able to be taken as a lump sum, income stream or line of credit.
While interest is charged, neither that nor the principal amount borrowed needs to be repaid while you (and whoever else is named on the home’s title) live in the property.
As tempting as this may sound as a way of cashing up, the Australian Securities and Investments Commission’s MoneySmart website warns that because the interest compounds, you may find that over time there is little left after the loan is paid out.
Negative equity protection laws on reverse mortgage contracts prevent a borrower from owing the lender more than their home is worth. However, whatever balance you are left with could reduce your options if you need to move into an aged care facility.
MoneySmart calculated that under some terms, a loan of $50,000 would grow to $232,000 over 15 years, and to more than $1 million across 30 years.
And, borrowing on your home will likely have an effect on whether you can claim the full Age Pension.
Option 2: Home reversion scheme
Under a home reversion scheme, you sell a portion of your property to a lender for cash.
But this option is limited to just one provider, Homesafe Wealth Release, which offers the Bendigo Bank-backed scheme only in parts of Sydney and Melbourne where home prices are unusually high.
No repayments are expected under the scheme. Instead, your lender buys part of your property and becomes a joint owner. For example, you may opt to sell half of your $650,000 home to the lender for a handout worth up to two-thirds of the 50 per cent stake – or around $215,000.
If you decide to sell your property later and it has increased in value by 20 per cent to $780,000 for example, the provider pockets $390,000, which is half the value of the property.
MoneySmart warns that the scheme is difficult to understand and price. Further, lump sums received and how you spend them could compromise your eligibility for a full Age Pension.
Option 3: Building on your property
With housing prices still strong in some parts of Australia, if you have sufficient land, it may seem attractive to subdivide your house block and build a second residence to sell.
Property expert and financial adviser Bruce Brammall, of Bruce Brammall Financial, says a growing number of building companies are catering to this trend.
In some states, a few builders claim to be able to keep the construction cost of a small unit below $200,000. With median prices for units ranging from $760,814 in Sydney to $341,686 in Hobart, according to the latest CoreLogic data, the opportunity to potentially cash in may look compelling.
Mr Brammall warns, however, that retirees should not be too dazzled by the potential flashing dollar signs.
“First, you need to have a big back yard and be able to put a driveway through to the second home. Plus, be aware of any council planning requirements that could make the project too expensive,” Mr Brammall told YourLifeChoices.
“Second, think carefully about taking the easy way out and just selling the empty portion of your newly subdivided plot. If you do this, you may have no control over what your new neighbours will build.”
As with other forms of accessing equity in your home, your Age Pension entitlements might be affected if you redevelop your property.
Retirees are urged to do their research and seek professional advice before attempting to access the equity in their home.
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