An expansion of the Pension Loans Scheme (PLS), which allows users to borrow against the equity in their homes, means funds will now be available from 1 July to all eligible people of Age Pension age. The amount able to be borrowed will also increase, although PLS holders will not be able to owe the Government more than their home is worth.
How does this work? Currently, there are about 1.8 million age pensioners who own their own home, including 1.1 million maximum-rate age pensioners and 700,000 part-rate age pensioners.
Previously, this scheme was not available to pensioners on the maximum rate, or to self-funded retirees. Both groups will now be able to apply for this loan without entitlements being affected.
Applicants will be able to borrow against the equity in their home up to 50 per cent of the maximum rate of the full Age Pension per year – an amount of $11,799 for single pensioners and $17,787 for couple pensioners. Loan repayments are still set at an interest rate of 5.25 per cent per annum – unchanged since 1997.
According to the Department of Social Services (DSS), under the expanded Pension Loans Scheme there are four situations that can occur:
- maximum rate age pensioners can borrow up to 50 per cent of the maximum rate of fortnightly Age Pension
- part-rate age pensioners can increase their fortnightly payment by whatever amount increases their pension plus loan payment up to a maximum of 150 per cent of the maximum rate of fortnightly Age Pension
- those self-funded retirees who have a loan under the existing Pension Loans Scheme can increase their loan by any amount up the 150 per cent threshold
- self-funded retirees who are precluded from any loan under the existing scheme can borrow up to the full 150% of the maximum rate of fortnightly Age Pension.
Participants in the scheme do not have to increase their loan payment to the maximum 150 per cent threshold. They can choose to borrow or top up to an amount below the 150 per cent threshold.
This expansion of the PLS effectively means the Federal Government will make money (the difference between interest charged and borrowing rates) through retirees’ need to supplement their income. It will also set the Government up as a lender, vying with other financial institutions offering reverse mortgages. And while it is a helpful strategy for asset-rich, cash-poor retirees, pity the 15 per cent of retirees who rent and who have no such access to income relief.
You may be able to apply for a payment under the Pension Loans Scheme if you:
- or your partner are of Age Pension age
- own real estate in Australia that you use as security for the loan
- or your partner receives a rate of payment that is less than the maximum amount or nothing due to either the income or assets test but not both
- meet Age Pension residence rules.
The current charge is 5.25 per cent compound interest on the outstanding loan balance.
Interest is added to the outstanding loan balance each fortnight until you repay the loan fully. The longer you take to repay the loan, the more interest you pay.
Have you ever applied for funds through the Pension Loans Scheme? Do the broader terms make it possible for you to apply?
Updated 14 May 2018: clarification of rules supplied by DSS