New product lets you sell a spare room to cash up

Product lets you realise some of the value in your home without having to sell.

New product lets you sell a spare room to cash up

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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    Disclaimer: All content on 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 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.





    COMMENTS

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    Triss
    6th Aug 2019
    11:25am
    Call me cynical but I’ll bet I can guarantee that the homeowners won’t be the ones winning in the end.
    Far better buying a cheaper car and letting the family pay for their own fares.
    tams
    6th Aug 2019
    12:15pm
    From a specialist adviser in Seniors Equity Release (with a credit licence to provide advice)

    In order of end costs to the consumer, here are the highest to the lowest in terms of retained equity

    1) Pension Loan Scheme - but only available as an income stream

    2) Traditional reverse mortgage - available as a lump sum, income stream, Line of Credit, or any combination.

    3) Homesafe Solutions - only available as a lump sum, providing a discount amount against the future growth of the property

    4) Domacom - primarily as a lump sum -selling a share of your home to multiple investors doesn't seem a good idea

    If you receive $100,000 and pay back $320,000 that is a compounding interest rate of 7.8%, not 5.5%
    GeorgeM
    7th Aug 2019
    1:02pm
    I agree, DomaCom is the worst option so far. PLS would be reasonable if only the interest rate was closer / linked to the Deeming Rate.

    All are methods to access and destroy part of that home equity which is protected by the pension asset tests, and reduce the inheritance you can pass on to your heirs.
    Chris B T
    6th Aug 2019
    1:03pm
    Find an individual whom you are Comfortable Sharing Your Home/Space with.
    Then have an agreement Drawn Up and Have a Bond Set aside.
    In this agreement you have Expenses Set Out For This Person to Contribute to, no rental agreement.
    That way the Costs of Maintaining The Home Is Reduce and No Equity or Property Share.
    The Method Being Suggested in the Commentary would Involve a sale so wouldn't Stamp Duty and other Fees be a requirement, even if it was 1% and every time the % increased.
    Raw Deal with compounding interest.
    KSS
    6th Aug 2019
    1:16pm
    What rights does the investor have to sell their share of your house?
    Farside
    6th Aug 2019
    1:34pm
    investor's fractional share of your house is represented by units, which investors can trade subject to there be a market for those units.
    AutumnOz
    6th Aug 2019
    1:44pm
    It sounds like just another way to deprive an elderly person of their home....a room at a time.
    Rae
    6th Aug 2019
    1:54pm
    What happens if the property market collapses and the house loses 40% of value and doesn't return to current values for decades. Yes that can happen and has happened in the past.
    Does the investor share the risk and still get 3% per annum.

    No way would I go in for a 4.4% bond right now secured by my property. It makes no financial sense for retirees not working and locked into the CPI.
    Farside
    6th Aug 2019
    3:32pm
    Won't the unit price decline in line with the property market but mitigated by the 3% notional rent based on the original value? If this is correct it could potentially enable a savvy owner to divest the risk of the house price tanking.

    It's hard to find something about this product that makes it an enticing investment for the fractional investor.
    sunnyOz
    6th Aug 2019
    4:56pm
    Another ludicrous sham - oops, scheme - to try and hoodwink the seniors. Since when does the government or any business do anything to actually benefit a person, instead of help their own bottom line?
    No - not for me.
    morrowj1122
    6th Aug 2019
    2:33pm
    You work all your life in Australia and diligently pay tax. A pension should be universal regardless of one's financial situation on retirement. I despair of the way our once great nation is/has headed. God help our children!
    johnp
    7th Aug 2019
    12:07pm
    agree with morrowj; there should be a universal pension instead of assets test plus would be financial advantage to govt !! The main leeches on society are the pollies !!
    GeorgeM
    7th Aug 2019
    1:07pm
    Quite right, the only sensible reform is to have Universal Age Pension. Then everyone can decide what they want to do with their assets, including downsizing, etc, without the Big Brother Govt (Centrelink) interfering in your choices. The time is coming soon when all Retirees need to join in and put maximum pressure on the Govt in the impending Retirement Incomes Review to scrap the Broken Age Pension system and go for Universal Age Pension.