WCH Investor Services Financial Planner, Craig McKenzie, gives further insight into the effective planning for your later years and some schemes that may assist you.

In the last newsletter we discussed the ability for those aged over 65 to contribute money into superannuation from the sale of the family home using the recently announced Downsizer Contribution. This initiative encourages people to make the move to downsize to unlock equity in their home, and to utilise the benefits of the superannuation system.

However for some people, remaining in their home might be the preferred option. The reasons for this can be many and varied, such as a desire for the home to stay in the family, or their friends and support network are in the area etc.

For people who do choose to stay in their home but need money to help with funding cost of living or major expenses, there are other options such as a Reverse Mortgage or the Pension Loans scheme.

Let’s have a look at each of these a bit further.

Reverse Mortgage

A reverse mortgage is a loan provided by a bank that allows you to borrow against the equity in your home as security. The loan can be drawn down as a lump sum, a regular income, or a combination of the two. You don’t need to make ongoing repayments, but interest is still charged and compounds over time and is added to the loan balance. The loan needs to be repaid when you sell or move out, when you die, or in most cases if you were to move into aged care.  

There are risks with this type of loan, such as:

  • Interest rates are generally higher than the average home loan.
  • Compounding interest means your loan balance can increase quickly.
  • The value of your home may not go up as much as you expect or could even fall in value.
  • The loan can affect your age pension.

The amount you can borrow depends on your age; the younger you are, the less you can borrow. As a general rule, if you are 60 the maximum amount is likely to be 15-20% of the value of your home, increasing by 1% for each year older than 60. Since 2012, there are protections in place so as you cannot end up owing more than the home is worth.

Pension Loans Scheme

The pension loans scheme is administered through the Department of Human Services and has many similarities to a reverse mortgage. The major difference being that you are not able to draw down a lump sum under this type of loan, you can only access funds via regular fortnightly payments. You can choose the amount of the payment but only up to the maximum rate of pension, so anyone currently getting the full pension will not be able to access the pension loans scheme. This will change from 1st July 2019, as it is proposed that the amount of payment will increase to 150% of the maximum pension.

Just like the reverse mortgage, you are not required to make ongoing repayments and the interest will compound on the loan balance.

A benefit of the pension loans scheme is that the loan is portable, meaning that if you sell your home you can transfer the loan to another property or your new home, or the loan can be repaid.

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This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.