Unlocking equity

Maurice Patane answers Shirley’s questions about unlocking the equity in her home.

Unlocking equity

Our no-nonsense financial planner Maurice Patane answers Shirley’s questions about unlocking the equity in her home.

Q. Shirley
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.

Maurice Patane
Access Financial Management AFSL 229760
Ph (03) 9500 9988
Email: maurice@yourlifechoices.com.au





    COMMENTS

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    Pass the Ductape
    30th Sep 2013
    12:19pm
    I wonder if the same rules would apply if you need to unlock the equity in your home to borrow funds to purchase a new vehicle - and how would Centrelink assess the situation concerning this process?

    30th Sep 2013
    12:28pm
    Just a word of warning regards Equity loans. Whilst these can be helpful as stated in the article the mention of "until you sell or vacate the home" is slightly misleading as when you borrow the money the lending body anticipates, depending on the age of the borrower/s, that the loan will be in place for a certain period of time.
    If you choose to sell or vacate then the loan amount plus interest PLUS a Break Fee will apply.
    This means if you borrow $40,000 and want to settle in say 7 or 8 years time then you could have a $15,000 break fee in addition to the original borrowing plus accumulated interest I base this on a interest rate of 8.3% pa fixed for the term of the loan.
    This in fact equates to your $40,000 becoming a settlement of $85.000 after the 8 yrs.
    Pass the Ductape
    30th Sep 2013
    12:34pm
    Ahhhh!....The plot thickens - as they say.
    scorps
    30th Sep 2013
    1:32pm
    I wonder how this compares with taking money from the mortgage redraw account?
    Anonymous
    30th Sep 2013
    2:46pm
    The plot does thicken as I am currently in this very position. The figures quoted are correct in my case.
    Pass the Ductape
    30th Sep 2013
    6:25pm
    Obliged for the info Bofor. As always, if it appears too good to be true then it always is. Only half the story (and the good half) is ever put forward in these situations. A pity that ALL the facts are not presented.
    Sylvia
    30th Sep 2013
    3:27pm
    One thing for sure is the banks always come ouot on top ?
    Pass the Ductape
    30th Sep 2013
    6:26pm
    You got that right Sylvia!
    tams
    30th Sep 2013
    4:05pm
    Thank you to Maurice for his comments.
    Across the range of Reverse Mortgage, the youngest age is 63 for one or more applicants, with a maximum of 15% or $150,000 whichever is lower.The amount which can be borrowed increases with age, in line with government regulations.
    All intending borrowers must be given an ASIC based calculator, with their intended loan amount input, and be shown the future net equity against their home. A Reverse Mortgage can also be used to pay for aged care costs, as some products do not require the home to be occupied. This will become more popular next year when aged care costs will include a means tested fee (in lieu of an income tested fee).

    In regard to Bofor comments, there are no BREAK fee costs on any of the current Reverse Mortgages as they are all variable interest rates. Bofor was referring to a fixed rate, which was available at the time of his application and he would have chosen the fixed rate producr to insure against higher interest rates (similar to a standard home loan). Current interest artes vary between 6.74 and 7.05%

    In regard to the Centrelink question, the funds can be used to purchase a car, and the car is then included in the assets position.

    Paul Dwyer Melbourne and Peninsula Reverse Mortgages
    Australian Credit Licence 387310
    Pass the Ductape
    30th Sep 2013
    6:30pm
    Great comment! Thanks for that bit of info Paul.
    BooBoo
    1st Oct 2013
    10:44pm
    Is there anyone know any way I can unlock my home equity before 63? Like others - asset rich and penny poor. Don't really want to move but things are getting a bit desperate. 59 and on a disability pension and just not making ends meet. Would love to be able to indulge myself a little instead of watching pennies. I have no children of my own so really wouldn't worry me what was left for the vultures to pick over.
    Anonymous
    2nd Oct 2013
    2:00am
    Have you approached the Commonwealth Bank? or Seniors Finance re equity mortgage?
    tams
    2nd Oct 2013
    7:26am
    Dear BooBoo,
    At your age, neither Commonwealth Bank or Seniors Finance will be able to provide you with a seniors equity release. There may be alternatives, but your own personal situation would need to be taken into account.
    Paul Dwyer
    Email tgm2@bigpond.com
    Anonymous
    2nd Oct 2013
    9:01am
    Just a thought Boo Boo, what if you sold your home under the understanding that you could rent back?
    This way you would get your equity PLUS be entitled, if you are on any form of centrelink pension, to rent assistance.You could spend your equity immediately OR put as much as you wish in a Challenger Annuity and increase you monthly income all without affecting your pension.
    rob101
    2nd Oct 2013
    2:52pm
    never ever get a Reverse Mortgage,on your Property.Best deal around is Bendigo Bank,they advance you an amount,you pay it back when you sell the Property.or become Deceased,Charges and fees are Managable.And
    bob101
    tams
    2nd Oct 2013
    3:31pm
    Hi Rob 101,
    I have represented both products, and currently fully support Reverse Mortgages, and in some cases recommend Bendigo Bank when the funds required are higher.

    In the situation of lump sum, both products work out similarly in terms of monies to be repaid. When funds are taken periodically, as suggested by the Maurice Patane, a Reverse Mortgage will leave a far greater amount of equity - based upon average interest rates and property growth patterns.
    The Bendigo Bank product is a real estate transaction, selling a portion of your property's future value at a discounted rate today, a concept many seniors find difficult to comprehend.
    A Reverse Mortgage is the most consumer protected home loan product in Australia, with Government legislation and ASIC regulation.

    Paul Dwyer
    Tassie Devil
    7th Oct 2013
    3:23pm
    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.

    but what about paying tax , sure as income increases so does your tax ?
    tams
    7th Oct 2013
    3:50pm
    Hello Tassie Devil
    Taking equity out of your home is regarded as a drawdown on capital and not as income. You could actually take $100,000 per year out of your equity (if allowed), and it's how you use it will determine any taxation implications.
    Paul Dwyer
    Tassie Devil
    7th Oct 2013
    7:38pm
    Hi Paul,
    I want to do renovations but not sure if i should take a lump sum and have everything done in one hit or take a monthly payment save up and do the renovations bit by bit ?
    tams
    7th Oct 2013
    8:07pm
    Dear Tassie Devil, As you may be well aware, the family home is an exempt assset, so that any monies spent on renovations/maintenance are also exempt from the assets test. (This is not to be the case next year when the family home will be assessed at $144,500 for the means tested fee for aged care).
    There are a number of aspects for your considerations.
    1) How much do you need.
    2) How much will the lender provide, according to your age and home value
    3) How long do you estimate your renovations will take.
    There are other considerations. Do you want your home to be an ongoing reno site, or want to get it over in one hit.
    In either event, you will need a loan which covers all your needs if you intend to use borrowings to complete the overall task. You can then take what you want, when you want.
    Regards,
    Paul Dwyer