Prime Minister Scott Morrison wants to save retirement, by helping older Australians tap into their home equity with an ‘upgraded’ Pension Loans Scheme (PLS).
The PM says his new reverse mortgage scheme, set to be announced in Thursday’s mid-year budget update, will significantly boost uptake of the cashflow support program.
The PLS provides older Australians with non-taxable fortnightly loans and lump-sum payments using their property as security.
The rebranded Home Equity Access Scheme (HEAS) will be available to Australian property owners of Age Pension age, but not only for pension recipients.
From 1 January 2022, the government will reduce the scheme’s interest rate from 4.5 to 3.95 per cent, lower borrowing costs and give older Australians access to loan payments for longer.
Additional changes already announced in the May Budget will allow property owners to receive lump-sum advance payments from 1 July 2022. Homeowners aged 66 and over can receive two lump-sum payments a year, capped at 50 per cent of the annual Age Pension rate.
While the announcement may be seen as a ploy to win over retirees in the lead-up to a federal election, the government may not have done its homework if it believes this will secure senior votes.
YourLifeChoices research shows that 82 per cent said a reverse mortgage would not suit their needs and just under 79 per cent said they were ‘not at all likely’ to use a reverse mortgage.
“We do not need a Pension Loans Scheme … what we do need is an Age Pension that is at a liveable level, without all these income and assets tests,” said one YLC member.
The federal government has long been hinting that older Australians will, in the near future, need to do more heavy lifting in order to fund their own retirements. Tapping into home equity is just one of the options they will need to consider.
The other option would be including the family home in the Age Pension income and assets test, up to a certain value threshold, as some MPs and economists have long been calling for.
Social Services Minister Anne Ruston says the PM’s plan will give senior Australians “more choice and control of their retirement lifestyle”.
“We want to give older Australians more confidence to tap into home equity to enhance their retirement living standards,” Senator Ruston told The Australian.
“We know many older Australians have worked hard to accumulate wealth in the form of real estate equity.
“The scheme can help people access this equity to supplement other income and improve overall wellbeing in retirement. The lower interest rate, together with the upcoming enhancements, will make the scheme an attractive option for many retirees looking for a boost in their income.”
The revamped reverse mortgage scheme has been designed in response to last year’s Retirement Income Review, which suggested more retirees could use their home equity to substantially improve their retirement incomes.
Since 2019, uptake of the scheme has grown by 564 per cent, from 768 applicants to 5100.
Earlier this year, advocacy group National Seniors urged the government to review the interest rate, saying the original 4.5 per cent levy scared asset rich, cash poor retirees from tapping into their home equity.
“Unfortunately, while the [scheme] is a good idea, it has been poorly promoted and has an unattractive interest rate,” said a National Seniors spokesperson.
“This rate is especially off-putting, given record low interest rates.”
The government hopes the lower 3.95 per cent interest rate, which compares favourably with available commercial reverse mortgages, along with the “no negative equity guarantee” and immediate access to lump sums, will increase participation and unlock “new and innovative ways to support age pensioners and self-funded retirees”.
“The scheme is available to all Australians who have reached Age Pension age – that includes people who are part-pensioners and self-funded retirees – which is why we are changing the name to the home equity access scheme to make it more inclusive,” said Senator Ruston.
“The popularity of the scheme has grown more than fivefold in fewer than two years as our expansions to the scheme have allowed more retirees to tap into the equity tied up in their homes to pay for their living expenses.”
While the rate change has been welcomed by Pension Boost chief Paul Rogan, he says it could have come sooner.
“We had raised a petition to have the PLS rate reduced and are pleased to see the government has acted,” says Mr Rogan.
“Whilst the PLS rate has been improved, the reduction reflects changes that should have been made when the RBA made COVID-19 emergency reductions to the benchmark interest rate during 2020.
“However, those participating or considering participating in the scheme still deserve a fairer and more transparent rate-setting mechanism so that retirees can have greater confidence and trust in the Scheme and this remains outstanding.”
Mr Rogan says a revised rate-setting mechanism would make the scheme more attractive to consumers.
“Based on our discussions with clients, the fact the Scheme is provided by the government provides a level of comfort to seniors when comparing their reverse mortgage options,” he said.
Home equity provider Household Capital also welcomes the government’s commitment to make home equity more widely available.
“Household Capital’s mission over the past five years has been to make home equity the third pillar of retirement funding,” said a Household Capital spokesperson.
“We have been working with the government and have a clear indication it supports a strong and vibrant market which can provide multiple options for Australian retirees to access their home equity.
“However, the Centrelink PLS reverse mortgage would be further improved for retirees if the government committed to provide full consumer protections, responsible lending and improved customer service.”
Retirees should welcome the scheme with open arms, says the national president of the Association of Independent Retirees Wayne Strandquist.
“Retirees welcome the reduction of 0.55 per cent in the interest rate applied by the government to access the equity tied up in their home.” he said.
“The interest rate of 4.5 per cent was too high and well above the available home loan interest rate. The rebranded scheme better describes its purpose rather than being only intended for age pensioners. The new name will broaden its appeal to self-funded retirees and potentially increase the take up of the scheme.”
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