7th Mar 2018
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Cashing in on your property: the pros and cons
Author: Olga Galacho
Cashing in on your property

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.

Disclaimer
No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor.

Are you asset rich and cash poor? Are you going to downsize for cash?

Do you know if you qualify for an Age Pension? Find out with our RetirePlanner tool.

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    All content on the 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 ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness with regard to your 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. Financial comments provided by readers cannot be relied on as professional advice, but as general comments only.





    COMMENTS

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    in2sunset
    8th Mar 2018
    10:46am
    Have just seen first hand the mess a reverse mortgage can do to elderly person. Old, vulnerable, the elderly are easy prey to the slick sales pitch espousing all the positives, but neglecting to mention the numerous pitfalls. Especially if elderly may need to go into nursing care residence.
    tams
    8th Mar 2018
    11:26am
    Re your information on reverse mortgages. It's time to pull apart the myths and mistakes in your article.
    The current age to be eligible is 55 years (as regulated by ASIC) but the earliest any lender in the market will assess applications is 60 years.
    You have taken an interest rate example (which is the default Rate) and it is clearly inflated. ASIC requires anyone who is interested in a reverse mortgage to be shown the calculator. The current interest rate is to be shown (between 6.25 and 6.37%). From this the calculator shows the net position with the current rate, plus another example with an interest 2% higher than the current interest rate.
    For your information, the only time over the past 13 years that reverse mortgage interest rates hit 10% was a short period in 2008 when variable rates on standard home loans hit 9.58%. The average rate for reverse mortgages over the past 13 years has been around 8.5%

    If you were to take the example of the $50,000 as an income stream taken as $5,000 per annum for the 10 year period, at the end of 15 years the loan to be repaid at 8.5% is $115,134, far different to the $232,000.

    What you failed to reveal is the growth in the home. The default 3% growth indicates a $700,000 home would be estimated to be $1,090,000 in 15 years.
    The estimated position using the funds as an income stream would be net equity of $984,846 - that's $284,846 greater than the current position.

    Your last statement is a howler -
    "Borrowing on your home will likely have an effect on whether you can claim the full Age Pension"
    Clearly just uninformed or mischievous

    Releasing equity Is not for everyone (neither is having a credit card) but at least we need to have reliable information
    Emps
    8th Mar 2018
    11:47am
    The article is clearly referring to information from Deloitte's and Money Smart. You ought to acknowledge that in your criticism.
    Sundays
    8th Mar 2018
    12:15pm
    Tams, you are right. I find that most of these articles by YLC are usually only partly factual, there are errors of omission and poorly researched. They seem cut and paste exercises. I note this article has a disclaimer which is just as well. Regarding Centrelink If you take your reverse mortgage as a regular payment it is exempt from the income rules, if you take a lump sum it’s exempt from the asset test for up to 90 days but is subject to deeming. Spend it, no effect. The interest rate is higher and there are risks which is why I am not a fan but it’s an option for some which is preferable to being poor
    Cowboy Jim
    8th Mar 2018
    11:40am
    Option 3 would be far too costly for most retired people. If they have that type of money they might as well stay put. Should we run out of money we would just sell the house, start renting again, get rent assistance and we would be allowed $210'000 more assets being non-home owners. Most people have problems with their bigger houses because their kids would
    like to inherit them and probably already counting on it. Let the kids look after themselves;
    if you were just in Commission accommodation you most probably would hardly ever hear from them.
    Knight Templar
    8th Mar 2018
    2:24pm
    Readers should also be aware that whilst there is a clear benefit in not having to pay tax on a non-concessional contribution into their super funds of up to $300,000, the increased value of the super fund will be subject to the existing income/assets test. This may result in a reduction or total loss of aged pension.
    Cowboy Jim
    8th Mar 2018
    4:52pm
    Never a truer word, KT. Might as well spend the stuff right now while above ground and maybe some of it under the floor boards, eh? When the young people are reading this will there be any in their right minds put more of it in super?
    Hasbeen
    8th Mar 2018
    5:37pm
    If I were to downsize just a detached house would not be good enough. Most of the developments today are so small as to be ridiculous. Spit out your window, & you are likely to get 3 neighbours.

    At an age where we can finally afford a few toys, including a couple of cars, we need the old quarter acre block just to park them.

    If you are like me you will have one daughters horse, another's dog, & the sons cat all to mind. You'll have at least a room full of ones furniture, & so much gear they can't fit in their McMansions tiny garage, that your shed will be full too.

    Downsize into an apartment, or an attached house, not bl00dy likely.
    Mum
    8th Mar 2018
    7:34pm
    There seems to be a negative attitude towards downsizing to a smaller home. It is entirely a personal choice. After living in a biggish 3-bedroom home for over 30 years, and with our three children in their own homes, we sold our house and bought a two-bed two-bath apartment in a block of 33 units. We bought off-the-plan, and our smaller home actually cost $22000 more than we received from our house sale. We have no mortgage.
    Our apartment is very close to a hospital, and as I was on home renal dialysis when we moved in, that was a plus. (I have since had a transplant, and have gone back to part-time teaching.)
    We are going overseas soon, and we know our home will be secure and safe.
    We are in a lovely and very convenient location in a brand-new home, with no driveway, gutters, fences, etc to worry about. We have great neighbours in our block, and we have a small garden/courtyard.
    Of course we have to pay quarterly strata fees, but we are happy with our choice.
    Cowboy Jim
    8th Mar 2018
    7:45pm
    Mum, I thank you for a positive input into this discussion. Some times hard to find someone who is happy in retirement.
    Mum
    9th Mar 2018
    4:24pm
    Thanks, Cowboy Jim!
    Muriel
    15th Aug 2018
    4:13pm
    A friend has an equity overdraft line of credit for 300,000 @ 5.8% ... He draws on it for emergencies & irregularly but it's now built to nearly 50,000
    He declares Centrelink aren't interested in this & that his pension is not affected
    Does anyone knw if this is fact..!!??


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