Many older Australians rely on the Age Pension because they don’t have enough super to fund a comfortable retirement.
According to the Association of Superannuation Funds of Australia, a 65-year old retired single person needs an annual income of $28,254 to fund a modest lifestyle, and $44,412 to fund a comfortable lifestyle. For a couple, those annual incomes are $40,829 and $62,828 respectively.
Now what’s modest versus what’s comfortable can be a matter of opinion! And what about life’s little luxuries?
When you are on a fixed income, it can be a challenge and a worry to manage your monthly cash flow.
Your home could be both the best place for you to live and the right way to fund your retirement lifestyle.
Put simply, the equity in your home is the value of the asset you own (your house or unit) minus any debt you have secured on it (for example, a mortgage). Another way to think of it is the amount that you would get to keep if you were to sell your home and clear any mortgage.
Rather than selling your home, you could safely access this equity via a reverse mortgage, which enables you to access the equity in your home and comes with a range of consumer protections.
No. With a reverse mortgage, the value of what you owe can never be more than the value of what you own. This avoids burdening your family or your estate with the “negative equity” problem when you move out or pass away. (Negative equity would mean that even if you sell the property you still owe money to the lender.)
If the value of your house is going to go up then, from a purely financial perspective, the answer is no.
A home reversion scheme is very different from a reverse mortgage. It’s not a loan; it’s a contract for sale for a part of your home. This means you’re actually agreeing to give up some of the future value of your home in exchange for a lump-sum payment today, usually at a significant discount to its current value.
With a reverse mortgage, you retain 100 percent ownership of your home. When you sell it, you repay the principal borrowed and the accrued interest. Then, after paying any other selling costs, you retain the rest of the money. You don’t have to give away a share of its capital value.
Also, it’s likely that you can access more money by working with a specialist such as Household Capital, a retirement funding provider that offers a reverse mortgage product called a Household Loan.
Here are some real life case studies* from Household Capital, so you can see how a Household Loan works in practice and can transform retirement.
Jack and Mary are both in their 70s and own a lovely house in Sydney’s Palm Cove, valued at $3 million. They are fortunate to have enough super to fund a comfortable lifestyle.
They have two daughters, both married with children, both working full-time to pay their large mortgages on houses in Sydney. Jack and Mary wanted to help their daughters but could not afford to dip into their super; they enjoy being independent and don’t want to have to rely on the Age Pension.
Household Capital was able to offer Jack and Mary an LVR (loan-to-value ratio) of 32 per cent to access up to $1 million of their home equity. This enabled the couple to help their daughters with a gift, while leaving sufficient home equity available should they need draw on it in the future. As well as retaining plenty of equity, Jack and Mary will also benefit from the full increase in their home’s market value over time.
As they don’t qualify for Centrelink benefits, this strategy didn’t need to consider Jack and Mary’s eligibility for the Age Pension.
Max is 72 years old and lives in a beautiful Federation-style cottage in Hawthorn in Victoria, valued at $1.8 million. Due to incapacity, Max needs significant medical support and care. He enjoys living in his own home and doesn’t want to go into residential care until it’s the last remaining option.
Max’s financial affairs are administered by a trustee who worked with Household Capital to establish a funding facility at a 27 per cent LVR for Max to access up to $480,000 over time, drawn each month to pay his regular expenses.
Max can now extend the time he remains living in the home he loves. As he’s only drawing on the money when he needs to spend it, he doesn’t have to declare an asset to Centrelink and won’t affect his entitlements.
Helena recently moved from Sydney to Orange. She is 69 years old and lives by herself. She has one married son, a lawyer in Sydney, and a school-aged granddaughter.
She is very happy with her “tree change.” She has bought a newly-built single storey-house with a garden and outdoor entertainment area for $750,000.
As a widow, she relies on the Age Pension and manages her finances very carefully. She was disappointed to find that she didn’t have as much money left over after selling her home in Sydney as she expected, due to all the costs of selling, buying and moving house.
Helena sought out Household Capital because she believed her savings to be insufficient to buffer her from future unexpected expenses. She also wanted to redecorate her new home and help pay for her granddaughter’s education.
Household Capital was able to offer Helena an LVR of 24 per cent to borrow up to $187,500. After taking advice about how to avoid any impact on her Age Pension, Helena chose to draw her home equity in stages: $35,000 now for the home redecoration, $25,000 for her granddaughter’s school fees, plus a regular monthly income.
*Please note: names have been changed to protect the privacy of those used in these examples.
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.
Whether you want to make your home more comfy for retirement or would like some extra monthly income, your home equity can be used in a myriad of ways to improve your retirement lifestyle. Try our easy-to-use calculator to see how much you could potentially access.