The cry for more decumulation products for Australian homeowners has been heard with a new product that enables you to realise some of the value in your home without having to sell. But be sure to read the fine print.
The Senior Equity Release product has been launched by Australian Securities Exchange-listed platform DomaCom.
The product is marketed as one that enables older Australians to stay in their homes while taking a cash share of its value. It’s a managed investment scheme registered with the Australian Securities and Investments Commission, and essentially turns your home equity into shares and connects you with people who want to buy in.
People over the age of 60 can ‘sell the back bedroom’ – that is, a fraction of their home, Aged Care Gurus principal Rachel Lane wrote in The Age.
“The seller nominates the price and whether they wish to receive a lump sum or monthly payment,” she explained.
“On the other side of the transaction is the investor. They receive a monthly income of three per cent and a share of the capital value of the home.
“Maintaining the property and covering ongoing costs, such as insurance and rates, is shared between the seller and the investor.
“When the property is sold in full, the seller and investors each receive their shares of the sale price.”
Ms Lane said the product overcame a key drawback of the extended Pension Loans Scheme (PLS) in that people can choose to take their equity as a lump sum or monthly payment.
It also overcame a common issue with other equity release products in that there are no restrictions by postcode. “This means anyone can obtain equity release, provided there are investors to buy in,” she said.
Ms Lane presented this example.
“Jack and Shirley have a house valued at $800,000. They want $100,000 to buy a new car and take a family holiday. Using the DomaCom Fund, they need to sell 16 per cent of their home to realise $128,400.
“Jack and Shirley would receive $100,000. The other $28,400 is used to pay the product fee (1.4 per cent per annum) and rent to the investor (three per cent per annum) for the next five years.
“At the end of five years, DomaCom sells more of the property to cover the rent and fees for the next five years, based on the value of the home and the existing debt at the time, and so it goes on.
“Like all equity release products, the homeowner’s share is reduced over time.
“In Jack and Shirley’s case, the $100,000 borrowed would mean that if the house was sold in 15 years for $1.21 million, Jack and Shirley would receive $890,000 and the investor would receive $320,000.”
The Combined Pensioners and Superannuants Association (CPSA) says it prefers the PLS because “(1) the service fee payment is in advance; (2) you pay an establishment fee and financial advice fee, you pay an effective rate of an estimated 5.5 per cent.”
It says: “In fractional investing, investors eventually also share in the capital gain (or loss) made on the eventual sale of your house. Assuming a capital gain will be made, this means that the effective service rate you are paying in fractional investing is much higher.”
Have you investigated this new product? Will you? Would it help you to age at home for longer?
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