Are you an asset-rich but cash-poor homeowner? Emmett Wilkinson has some solutions.
Owning your home is, for good reason, a goal of most Australians and for most homeowners it will become their biggest financial asset. Homes can, however, tie up your cash, so what are the options for those who want to use their home to generate extra retirement funds? Let me explain.
Downsizing is a growing trend driven by lifestyle and financial reasons. But if you are looking to come out with money left over, then you need to ‘think before you shrink’.
My widowed neighbour, Val, recently sold her family home of 50 years and bought a two-bedroom apartment in a new development close to a major shopping centre around five kilometres further out from the CBD than her previous home. The move left Val with about $400,000 in change and no lawns to mow.
Do your sums on the selling/acquisition costs and be aware that if you’re downsizing to a property with a higher land value area (e.g. moving closer to the city or to a beach hot spot), there may not be as much left over as you thought.
Moving to a retirement village is another form of downsizing, but with very different legal and ownership outcomes. It is important that you understand the entry costs, ongoing monthly costs and what you will get back on leaving the village. I strongly recommend you get a solicitor to review the retirement village contract so everyone is on the same page.
Downsizer super contributions
Superannuation laws have recently changed to allow homeowners over 65 to contribute up to $300,000 each to their super funds from the sale proceeds of their home when downsizing. Age pensioners need to be aware that by doing this, they are turning a means test-exempt asset (the principal home) into means tested assets (super when aged over 65), which may substantially reduce age pension entitlements.
Reverse mortgages and similar products
The four big banks have now withdrawn from providing new reverse mortgages and the field has been left to the smaller players.
The interest rates and terms will differ slightly with each provider, but common to all reverse mortgages is the fact that you will be borrowing funds that you will most likely not make interest payments on. The interest will compound and the proceeds of the family home, which the loan is secured against, will be reduced by the outstanding borrowed amount and accrued interest when it’s eventually sold.
There are also products known as home reversion schemes (sometimes called equity release or unlock) where a homeowner agrees to sell a share of the future sale proceeds of his or her home in return for a lump sum now. The lump sum received now will be less than the agreed share of the home’s current value though and it is important that the complex calculations and reasonings used in these contracts are explained and understood.
The Government’s Pension Loans Scheme (PLS) is similar to a reverse mortgage in that money is borrowed with interest accruing, which can be paid back when the home is sold. The PLS rate of interest is 5.25 per cent per annum which is lower than that charged by typical reverse mortgage providers.
It is important to note that borrowings under the PLS can only be taken as fortnightly income payments and not as a lump sum. The expansion of the scheme, which starts on 1 July, will make such loans available to all self-funded retirees (some were previously excluded) and increase the amounts that can be borrowed. Full rate age pensioners will be able to borrow up to 50 per cent of their annual pension payments and higher amounts will apply for part pensioners and self-funded retirees.
To date, the PLS has not been taken up by many people, but it could well become more popular when the new changes take effect as having the Government as lender may allay some people’s concerns about these products.
You only live once and if having something now, but giving away something in the future means a better life in the here and now, then who are we to judge? It’s an entirely personal choice.
If someone – usually a parent or relative – pays you for the lifetime right to reside in your home or in a self-contained building on your property, then what is termed a ‘granny flat interest’ is created.
There are several ways these arrangements can be paid for and there may be age pension implications for the person moving into the granny flat arrangement. It is recommended that legal advice be obtained before creating a granny flat interest so that the relationship and its terms and obligations are documented in writing. It is crucial to document what happens if the granny flat interest ends prematurely.
Developing the block
Subdividing your block and selling part of it off might be a possibility for some as might developing the property yourself.
Selling off part of your block may see you lose control of what is then built in your backyard while undertaking to build a new unit or townhouse on your land will involve legal and taxation considerations as well as the work involved in finding the right designer and builder and then living comfortably through the process.
Undertaking a property development of this type, especially if you haven’t done it before, could be a very risky retirement venture, particularly when real estate prices are volatile.
Renting out your home
There may be options to generate some extra income by renting out a room in your home or making your home available on a temporary basis via such platforms as Airbnb.
Swapping homes with overseas or interstate visitors when arranging holidays can also be a win-win situation in containing expenses.
How about renting out your driveway or garage if it’s not fully utilised and you live near a busy station or sporting ground? Websites such as spacer.com and parkhound.com will advertise your site and you could make $100–$150 extra per month depending on supply and demand.
Do you have other clever ways to make some extra cash from your home? Have you tried any of the suggestions above?
* Emmett Wilkinson is a Certified Financial Planner who specialises in superannuation, aged care and Centrelink advice.
This article first appeared in the March 2019 Retirement Affordability Index.
Disclaimer: All content in the Retirement Affordability Index™ 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.