If you’re one of the older Australians who’ve benefitted from rising house values over the decades, you may find yourself in retirement with no mortgage, a home that’s far more valuable than you ever imagined, yet a lower retirement income than you’d like.
And the ‘cash poor’ situation is worsening, with the rising cost of living and longer life expectancies putting an increasing number of retirees in straightened circumstances as their fixed retirement incomes fail to keep up.
But a new scheme has been launched that could provide a new way for cash-strapped Aussies to draw on the equity in their home, while continuing to live in it. Investment platform DomaCom launched what it calls its Senior Equity Release (SER) scheme this month, which allows people over the age of 65 to sell a fraction of their home – figuratively speaking, the back bedroom or second bathroom – to people with funds to invest.
“The company’s Senior Equity Release is the first financial product in this space that gives financial advisers the ability to provide valuable options to asset rich and cash poor senior Australians by enabling them to sell a portion of their property,” DomaCom CEO Arthur Naoumidis said.
“There are now over 3.8 million Australians over the age of 65, many of whom will be seeking to unlock their home equity and transition towards retirement living … With the number of Australians over 65 growing each year, we believe that the launch of our SER product puts financial advisers and DomaCom in a unmatched position to service retirees with this significant longterm growth opportunity.”
DomaCom is what’s called a ‘fractional investment platform’, which effectively means that DomaCom allows investors to pool their money, decide on which property or properties they wish to purchase from a selection available, and then DomaCom buys the property, places it in a fund and issues investors with units in that fund that are equivalent to the amount they invested.
ASX-listed DomaCom does all of the usual due diligence on the property purchase, such as conveyancing and valuation, just as an individual investor would do if buying a property they wished to rent out, but the fractional nature of the scheme means investors can spread their risk across a number of properties and exit the market by selling their units, which is likely to be less difficult and costly than offloading a wholly owned investment property.
On the other end, the equity release product – which is the first of its kind in Australia – allows the homeowner to set an asking price and request whether they would like to receive their cash from investors as a lump sum or in monthly instalments. Homeowners that take up the scheme are required to pay an annual fee of 1.4 per cent, as well as paying ‘rent’ to the investors on the portion of their property they sold.
The investors are guaranteed a 3 percent return on their investment, via the rent payments. The investors and the homeowner share proportional maintenance costs of the home and any capital gain made from an increase in the property’s value.
As with all equity release schemes, the homeowner’s share in the property decreases over time. However, according to aged care expert Rachel Lane, writing in the Sydney Morning Herald, the product could provide an easy way for older homeowners to allow adult children to buy some of their home, which may help them to avoid having to move into aged-care facilities.
There are other options for releasing cash from the family home, such as downsizing to increase superannuation savings. But many retirees don’t wish to move from their family home of decades.
Traditional reverse, or equity release, mortgages, are another solution retirees can call on if they want to stay in their home. In a reverse mortgage, a bank usually attaches a loan to the dwelling that allows the homeowner to stay in the home while drawing on the equity freed up by the loan either as a lump sum or a regular income payment. Interest is charged but instead of being payable immediately by the homeowner, it’s compounded so that the balance of the loan increases over time, gradually reducing the homeowners share of the equity in the home.
But reverse mortgages have become more difficult to obtain, as many banks have pulled back from that area of lending.
The government’s Pensions Loan Scheme, meanwhile, works in a similar fashion but is only available to homeowners who are eligible for a full or part Age Pension and payments can only be received fortnightly, not as a lump sum. Also, payments can only be up to the maximum rate of pension.
Lane noted that while DomaCom’s solution wouldn’t be the answer for all cash-poor retirees, the fact that another financial product had become available that could help some is a positive. She cautioned, though, that any homeowner thinking of drawing on the equity in their home in any way should obtain professional financial advice before signing any agreement.