In this year’s May Budget, the Federal Government threw retirees a lifeline in the form of an expanded Pension Loans Scheme (PLS) from July 2019.
The scheme will be widened to allow all retirees to borrow money from the Government, using their house as equity through a reverse mortgage, regardless of the level of Age Pension they receive or even if they are self-funded retirees.
In the YourLifeChoices 2018 Retirement Matters Survey, we asked members if they would take up a Pension Loans Scheme offer and 13 per cent said they would.
However, the fact that 87 per cent of the more than 5000 respondents rejected the notion suggests there is still some healthy scepticism about the Government acting as a quasi-bank.
The scheme works quite differently to a standard loan attached to a mortgaged house and is designed so that you never end up owing more than the value of your property.
The funds drawn down are limited to a proportion of the Age Pension and are paid in instalments each fortnight.
Currently, only part-age pensioners or people who do not receive any income support pension because of the income or assets test are able to borrow instalments from the Government under the scheme.
The fortnightly payments are a top up to the level of a full Age Pension and any combined payments cannot be greater than a full Age Pension. If you already receive the maximum Age Pension, you are not eligible to apply for the PLS.
Known as a reverse equity mortgage, the loan is non-taxable and the term of the loan can be for a short time or an indefinite period. In order to borrow, a pensioner must use their home or other property as security.
A pensioner cannot borrow more than the worth of their house. That is, they cannot leave a debt behind for someone else to pay.
While the loans will be secured against a pensioner’s home, the amounts borrowed do not have to be paid back until the property is sold. However, if a recipient’s circumstances change, they may have to pay the loan back sooner.
The borrowings cannot be a lump sum as funds must be paid with the fortnightly pension. Any costs associated with setting up the loan must be paid by the applicant. An interest rate of 5.25 per cent will be charged. This is one percentage point cheaper than reverse mortgages on the market and considerably less than the lowest interest rate for a personal loan of 7.65 per cent, according to comparison site Canstar.
To be eligible for a PLS loan, you need to meet the following criteria:
- receive less than the maximum rate of income support pension or no pension, but be notionally assessed under either the income or assets tests at a rate greater than nil
- be of Age Pension age
- if you are part of a couple, your partner must receive a rate of payment that is less than the maximum amount or nothing due to either the income or assets test, but not both
- have sufficient property in Australia that you can offer as security for the loan.
For more information about whether you may be eligible for the expanded PLS from July next year, visit the Department of Human Services.
Would you consider taking out a pension loan to top up your payments? Would you prefer to continue living frugally so that you can pass on a debt-free home to your children? Do you think that the Federal Government should play the mortgage market this way?