Rate cut for retirees

After months of intense lobbying, the government finally cut deeming rates in July last year, recognising that they were out of step after the Reserve Bank’s cuts to official interest rates. In other money-saving news for retirees, the interest being charged on funds drawn via the Pension Loans Scheme (PLS) has also been cut.

Older Australians receiving payments under the PLS automatically began to benefit from the reduced interest rate from 1 January.

The interest rate dropped from 5.25 per cent a year to 4.5 per cent a year.

The PLS is essentially a reverse mortgage, except you can’t take it as a lump sum and interest compounds fortnightly.

The scheme was expanded in 2019 to include all eligible people of Age Pension age who have securable real estate owned in Australia.

The amount that can be borrowed, via a fortnightly loan, increased to 150 per cent of the fortnightly Age Pension.

Uptake of the scheme has been low – there were about 1100 participants late last year according to federal Treasurer Josh Frydenberg – but a surge is expected.

Calls to cut the interest rate being charged mounted as the Reserve Bank of Australia (RBA) cut the official interest rate to a historic low of 0.75 per cent.

Former Labor leader and current MP for Maribyrnong Bill Shorten said in Parliament: “The government is essentially acting as a bank for older people with mortgages. It has a good-hearted public service goal at heart.

“But when the Reserve Bank cut the official cash rate to a record 0.75 per cent on 1 October, this led to bank loan rates at three per cent and, indeed, as low as 2.9 per cent, while the government’s Pension Loans Scheme is still charging older Australians at 5.25 per cent.”

Mr Frydenberg confirmed that the government would review the rates, but said 5.25 per cent was “lower than the rates charged by the private sector”.

In other news, The Age reports that the Maximum Permissible Interest Rate (MPIR), which applies in residential aged care, has been cut to a new low of 4.91 per cent a year.

Rachel Lane, principal of Aged Care Gurus, explains.

“The MPIR applies to people funding their own accommodation in residential aged care.

“Essentially, whatever you don’t pay as a lump sum (known as a Refundable Accommodation Deposit, or RAD), you pay as a daily charge (DAP), which is calculated using the MPIR.

“For example, if the RAD is $500,000 and you pay $200,000, you will pay interest on the outstanding $300,000 at 4.91 per cent, or $40.36 a day.”

Does the lower interest rate on PLS borrowings make the scheme more attractive to you?

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Written by Janelle Ward

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