10th Mar 2019
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$900b in home equity could save your retirement
$900b in home equity could save your retirement

There is an estimated $900 billion in untapped home equity in Australia, which can now be tapped to help fund retirement or subvert the disinheritance of baby boomers’ children.

Research undertaken by Household Capital shows that 80 per cent of retirees own their home. The same group has released a product that allows retirees to tap into their home equity to help with expenses, enhance their income and fund the later years of retirement.

Many go into retirement with just $200,000 in superannuation – enough to fund around 10 to 15 years of retirement. However, many are living beyond those 10 to 15 years without the necessary financial support.

“Many people aren’t financially prepared to fund 25 or 30 years of retirement,” said Household Capital chief Joshua Funder.

“Longevity has [also] disinherited the children of retirees and we need to reinvert that.

“The way to re-inherit the children of baby boomers to provide the funds they need when they need it is to provide small access to the family home for things like house deposits, education requirements.”

Retirees would be able to transfer a portion of the value of their home into either their super or investment funds, use it to support family members or even fund aged-care costs.

“The substantial savings held by Australians in their family homes is a largely untapped resource that can be better utilised to help retirees live well at home,” said former minister for superannuation and Household Capital chair Nick Sherry.

Mr Funder says the aim of the product was created to allow Australians to live well at home.

“It’s a non-financial mission, it’s about giving Australians confidence in their long-term plans for retirement, trust in their own savings and recognising that their needs are valid and can be met,” he said.

Mr Funder said the new product addresses the downsides in existing equity-access products and other approaches, such as reverse mortgages.

“The reverse mortgage market focuses on people’s short-term needs and that had the potential to leave people income-poor and asset-depleted. That’s why we insist on making responsible long-term access,” he said.

There is a proviso for getting the loan: people need to have a specific purpose for it, such as topping up appreciating assets, passing it on to loved ones, home renovations or funding aged care.

“If you wanted a lump sum and you weren’t going to invest it into long-term assets, we say no. We are not comfortable with the risk of you going short in the later years of your retirement. This is purpose-driven lending. We are opening lending up in a constrained way and doing that responsibly,” he said.

What do you think of this product? Would you be tempted to access the equity in your home to fund your retirement? Would you use it to help your children?

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    COMMENTS

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    Arvo
    11th Mar 2019
    10:13am
    'Unfortunately, our minimum loan size would not be met".
    On regional and country home units under $150,000 market value.
    Old Man
    11th Mar 2019
    11:16am
    This product is not for me. My main reason is that the debt would not simply be a flat rate of interest against the borrowings but a cumulative rate of borrowings and interest on interest. In our case, we supported our children's tertiary education to try and ensure that they achieved a higher pay scale and this has worked out quite well. As we helped to establish them, now is our time to enjoy our available funds.

    It's interesting that $200,000 in super will supposedly last 10-15 years according to this article. Perhaps it was written by someone who is promoting reverse mortgages? If we look at the return generated by having $200,000 in super, there is an obligation to take 5%pa which is, initially, $10,000 or about $385 per fortnight and if added to a single age pension would be about $1300 per fortnight. (Couples would average about $1765 per fortnight)

    After 15 years of compulsory 5% deductions from super, the balance would be about $72,000 remaining but this figure hasn't included the return on investments by the super fund. The industry super funds, according to the latest figures, average just under 10% so to be practical, the original $200,000 will, on average, be closer to $268,000. I point out that all of these calculations are an average based on past performance.

    Perhaps some people will be able to live on the figures quoted above and some won't. As I have said before, one size doesn't fit all and all of us enjoy different lifestyles, live in different areas where costs are vastly different and have different priorities. I think that the article is misleading because it doesn't take enough factors into consideration.
    Greg
    11th Mar 2019
    2:22pm
    I don't believe your calculator Old Man - using the Money Smart calculator $200,000 after 15 years is around $5,000 (that's without any interest/growth).

    With a return of 9% for the 15 years the balance remaining would be around $170,000. I don't like to think of that as a given though, 9% year after year for 15 years is unlikely.
    Old Man
    11th Mar 2019
    2:40pm
    You may be right, Greg, but I can only use the averages given out by the independent authority. If you have a different independent source then I am prepared to run with their figures.
    Greg
    11th Mar 2019
    4:48pm
    What averages are you talking about - I'm using the figures you quoted, $200,000, 15 years, average just under 10% (9%). Just maths mate.
    Old Man
    11th Mar 2019
    8:28pm
    I see your point, Greg. The way I see it, if you have an average of just under 10% (actually 9.85%) increase and a deduction of 5% then you will finish up with more than you started. So using that logic, I consider the $268,000 mentioned is realistic.
    Sundays
    11th Mar 2019
    1:14pm
    Two things stand out. Firstly, they state it is a ‘non financial mission’ but then charge a variable interest payable when you sell the home. Not stated, so it will be higher than bank rates. It’s like people with mortgages who are make drawdowns and find they are just going backwards. Secondly, the idea that you can tap into your home equity to give a home deposit to your children could see your money gone if their relationship breaks up, or house prices go down but you still have a loan to pay off. Maybe, if you have no one to inherit and you need the money.
    tams
    11th Mar 2019
    1:43pm
    “It’s a non-financial mission"?
    Actually the product is a reverse mortgage. It is only available as a lump sum, thus missing the most beneficial aspect of the traditional reverse mortgage - a regular income instream.


    The prime strategy appears to be for clients to access equity for investment inside or outside of superannuation. That being the case the following issues come to mind.

    • It effectively offers a gearing strategy to clients who would not likely be either sophisticated investors or have an aggressive risk profile.
    • The strategy creates an assessable asset (super in drawdown mode or some sort of annuity style product) from a non-assessable asset (the family home) for Centrelink purposes.
    • It exposes borrowers to numerous risks including, but not limited to, market risk, interest rate risk, credit risk and longevity risk to add to the concentration risk already evident in the family home.
    • The ability for most people to contribute to super is restricted once they reach 65yo. This seems to conflict with the product requirement for the youngest of a couple to be a minimum age 65.
    • At an interest rate of 5.90%pa and a set-up fee of 1.5% of the loan amount the grossed up return on the investment is going to have to be significant to be viable (risk)
    • There are commercial providers of reverse mortgages in the market place offering borrowers the ability to draw down loans via monthly payments thereby giving clients a vehicle to generate Centrelink friendly regular income without the additional investment risks.
    • And in July we will have the Pension Loan Scheme an income stream funded by Government

    This is aimed at financial planners, looking for capital to invest for their older clients. What sort of return would be required to achieve an income plus covering the cost of funding?

    11th Mar 2019
    2:06pm
    Yep - what more evidence do you need to support inclusion of home in asset test. $900Billion plus to alleviate tax payer burden and pay off labor debt
    Rae
    11th Mar 2019
    2:34pm
    Labor hasn't got a debt. It's the LNP with all the debt. Over $600 billion of it with nothing to show for it except half arsed coal mining schemes and dead rivers.
    Triss
    11th Mar 2019
    3:50pm
    One section of the community, pensioners, should not have to pay the country’s debt.
    Anonymous
    11th Mar 2019
    8:48pm
    But people who sacrificed to accumulate very modest savings and have lower incomes than pensioners and no concessions, but cost the nation NOTHING in their retirement, SHOULD, Triss? That's Labor's view, and seems many Labor voters here agree with it. What a disgrace!
    Rae
    11th Mar 2019
    4:48pm
    I would do a lot of things before touching a reverse mortgage with an unknown interest rate and no income much.
    In fact selling things at market, growing herbs for restaurants, taking in air&b or ra boarder would be preferable or even downsizing.
    Compound interest is great when you can get it, not much now but it's a real bitch if you are the one paying it.
    musicveg
    12th Mar 2019
    1:21am
    Sell a few things on ebay, do some research, some of your old things could be worth a bit. For example I just sold a couple of old books I dragged out of my neighbour's skip bin (with his permission) and got $20 for them.
    MD
    11th Mar 2019
    6:18pm
    To be sure, there will be some attracted to this scheme and were all things to remain constant then maybe it may prove beneficial for them. Historically all things have remained constant surely, have they not? Prompts the question - so who benefits the most ? Retirees, their kids, or the fund managers. Maybe this is a win win situation for all parties, maybe it's just a means for the kids to upgrade to flasher premises or swan round in the latest model SUV. Ultimately it's likely to strain relationships of everyone involved if things go belly-up and who to blame then...the pollies again/still?
    Beware of predictions based on current trends as most smart operators are looking for an edge to get under the guard of the unwary. Were everyone satisfied to live satisfied with their lot in life then maybe we wouldn't have this endless lament of 'Why Me victimhood" - after all said and done, it's a gullible fool that looks for reliance on another parties goodwill. Good Luck!
    Cheezil61
    11th Mar 2019
    8:08pm
    It is still a LOAN that has to be paid back some time, somehow..who pays it back & what happens when you die owing this money,?? Instead of leaving the kids an inheritance or asset in theform of your home you leave them with a debt..how is this helping them ..or you even?? Or have i missed something here??
    GeorgeM
    11th Mar 2019
    9:11pm
    Yes, a very irresponsible article as it doesn't even mention the interest rate or how / who / when it will need to be paid back. Clearly someone spruiking a product for their own benefit, and best ignored.

    BTW, the whole presumption of this scheme, and also the Govt's loan scheme announced recently, is that age pensions are not enough! One would think the Govt, if it was sensible, would address that issue more directly. Instead of developing schemes to attack the last asset of any pensioner. Pigs.
    double j
    11th Mar 2019
    8:11pm
    I don’t like reverse mortgage or the yet to be introduced government pensioners loan scheme but any of the above could be a way of off setting. “ Death Tax” which will most likely be introduced in the near future by who ever is in government because the government of the day will have bled all the money from pensioners and self funded retirees and will be looking for another tax to fund another government failed scheme
    musicveg
    12th Mar 2019
    1:23am
    More like fund the ongoing pensions of MP's.
    tams
    11th Mar 2019
    9:52pm
    John is 70 years, single with a home valued at $800,000 and no savings.

    He has determined he needs $20,000 per annum for 10 years ($1,666 per month)

    Options

    Pension Loan Scheme
    Maximum of $463 p/f (max $1,003 per month) – Doesn’t meet his needs

    Reverse Mortgage
    $1,666 per month for 10 years at 6.54% interest ($495 app fee) loan balance at end of 10 years is $282,124

    Household Capital
    $200,000 lump sum for 10 years at 5.9% ($3,000 app fee) loan balance at end of 10 years is $381,927.
    There are two factors to consider.
    - If his conservative investment strategy is term deposits at 2.6% (this is not investment advice from yours truly), interest received would be $28,600
    - He would lose $3,770 in pension payments over the first 5 years under the deeming assessment.

    I note all three options are reverse mortgages by definitions.

    And then there is Homesafe Solutions (via Bendigo Bank).
    A $200,000 amount on a property growing at 4% per annum would cost in excess of $440,000 to repay at the end of 10 years.

    If you have a need for additional income in retirement, this is a perfect example in not listening to product providers.
    fairdry
    19th Apr 2019
    9:08am
    Hi Old Man, I noticed over 15 years the super compulsory drawdown will increase to 7% which will be using up there investment quickly if the market isn't so kind. 65 to 74 is 5%, 75 to 79 is 6% and 79 to 84 is 7%. MD made a lot of sense. Beware of the reverse mortgage and Bugger the kids enjoy what time you have left.


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