In Retirement Income on Tuesday 24th Aug, 2021

4 ways to safely access equity in your home for a better retirement

Aug 24, 2021
Rising property prices in Australia will likely offset some of the interest rate cost of a reverse mortgage.

Retirees and home ownership in Australia

The Federal Government’s 2020 Retirement Income Review examined the three pillars of the Australian retirement system – the age pension, compulsory superannuation and voluntary savings – and concluded that, “The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement. Homeowners have lower housing costs and an asset that can be drawn on in retirement.”

At present, about 80 per cent of retirees are homeowners. This is a particularly high rate of homeownership by international standards, which not only benefits individuals but the wider economy. Homeownership lowers age pensioners’ living expenses and means that the system is very cost effective for Australian taxpayers.

As housing is exempt from the Age Pension’s assets test and capital gains tax, it is a preferred form of retirement savings for many. At present, most Australian retirees have saved three to four times as much in their home equity as in superannuation. Indeed, about 15 per cent of pensioners live in homes valued at more than $1 million, although the vast majority of these are in Sydney or Melbourne. (Many in this situation are referred to as “asset rich and income poor”.)

Many older Australians thinking of accessing equity in their homes have concerns though, as the family home is more than a store of wealth – it’s also of huge personal and psychological importance. It may also be the most important asset they leave as a bequest. It’s therefore well worth doing your homework, to ensure you have the right product for your purposes.

What products are available to access equity?

There are several different products to help access equity in the home. Four of these include:

  • These offer the choice of income stream, line of credit, lump sum, or a combination of these. A lump sum could be used for purposes such as paying out a mortgage at retirement, covering the cost of large expenses such as home renovations, assisting younger members of the family with a home deposit or education expenses, or providing additional resources for in-home or residential aged care.
  • The Pension Loans Scheme (PLS): This is effectively a government provided reverse mortgage for age pensioners and self-funded retirees, designed to supplement retirement income up to 1.5 times the maximum Age Pension per fortnight. There are no regular repayments through the life of the loan, and income from the scheme is not assessable in the Age Pension means test. Since the last Federal Budget, it has become possible to access a limited lump-sum advance under PLS equivalent to $10,000 for a single retiree and $18,000 for a couple per annum.
  • Home reversion: This is a property transaction rather than a loan, where you agree to sell a portion of your property to a provider or investor in return for a lump-sum payment. Any future growth in property value is shared, based on the percentages of ownership. The home reversion provider pays a ‘discounted’ amount for the share of equity, which can be much lower than the current market value. For example, you could sell 50 per cent of the future value of your home, but only receive somewhere between 25 per cent and 40 per cent of the value up front, depending on your age.
  • Fractional equity release contracts: These are not as well known. They are where you sell a portion of your home to one or more investors in return for a lump sum or a regular income stream. All property costs are shared between the owner and the investors and, every five years, an additional small part of equity is used to pay a notional rent to the investor as a return on their investment. The owner retains the title of the property and the right to continue living there. A valuable feature is that equity release products also qualify for the tax-free Downsizer Contribution, allowing retirees to stay in their home but contribute funds from the sale of a portion of their equity into their superannuation accounts.

Each equity access product (listed above) has different features that may or may not suit an individual retiree’s needs. Note that accessing your home equity while you live at home always has an interest cost or equivalent. As the Moneysmart website points out, it’s essential to get some independent advice regarding how such a transaction might impact your Age Pension entitlements, bequests etc. There’s also a fact sheet from Service Australia to assist.

Are these products well regulated?

Prior to 2012, reverse mortgages were not subject to product specific legislation and were regulated at the state level, resulting in highly variable customer experiences and product designs that generated unexpected outcomes for customers and misaligned selling practices.

Since 2012, however, federal reverse mortgage legislation has provided significant consumer protections, limiting loan-to-value ratios, guaranteeing occupancy, and ensuring people cannot have negative equity in their homes.

There are strict limits on what you can borrow against the home, starting at 20 per cent of equity at age 60 and increasing by 1 per cent with each year of age. These measures ensure in all but the most extreme economic scenarios that homeowners can expect to own a majority of their home equity by the time they reach 90 years of age.

Please note, the PLS, home reversion and equity release products are not subject to the same protections as a reverse mortgage under the National Credit Consumer Protection Acts (NCCP).

Why do reverse mortgages cost more?

Sometimes people ask why the interest rate on a reverse mortgage is higher than a standard mortgage. It’s important to recognise several factors that contribute to a higher cost. First, there are no regular repayments on a reverse mortgage, you only repay at the end of the loan. Second, the term of the loan is uncertain, there is no clear end date, as it is up to the borrower’s personal circumstances when they choose to complete the loan and repay the principal. These factors greatly increase funding costs for the lender.

The impact of a reverse mortgage on the capital value of the property, however, is less than you might think. Constantly rising property prices in Australia offset the interest rate cost of the reverse mortgage. An example is given in the Retirement Income Review of a retiree who draws $5,000 each year against equity in a home worth $500,000. From the point of retirement at age 67, and with a 3 per cent per annum increase in the home’s value, the property has an accumulated debt of only about a quarter of its value by the age of 92.

(All data in this article is drawn from the Retirement Income Review, unless specified otherwise.)

HOUSEHOLD CAPITAL INFO Important information. Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable, and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876. HOUSEHOLD CAPITAL™, the Star Device and Household Capital and the Star Device are trademarks of Household Capital Pty Ltd.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

How could a reverse mortgage transform your retirement?

Whether your home needs reroofing, your mortgage needs refinancing or your teeth need recapping, your home equity can renew your retirement and help you enjoy the lifestyle you deserve. Try our easy-to-use calculator to see how much home equity you could access.

CALCULATE NOW

Did you find this article helpful? Which of the four different equity release products described did you most like the sounds of?

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