In Everyday money on Wednesday 8th Jul, 2020

Self-funded and living on a lower income? Your home may be the only help you get

Jul 08, 2020
Retirement is more relaxing when you know you have a secure source of income.

The Covid-19 pandemic has impacted every Australian in some way. From the millions of people forced to change how they work or work fewer hours to those who lost their jobs entirely, the financial pain has been shared widely over the past few months.

And the government was rightly quick to step in and offer help. The JobSeeker allowance was nearly doubled to support those who lost their jobs, while many of those whose incomes were reduced were kept going with JobKeeper payments.

Meanwhile, about 6.5 million people, including all Age Pensioners, received a $750 Economic Support Payment and will get another $750 this month .

The problem is that this help wasn’t applied across the board. Some of the Australians hardest hit in terms of loss of income were self-funded retirees. Yet they received no assistance.

Self-funded retirees’ financial pain

Where have the hits come from? Pretty much everywhere.

The Reserve Bank of Australia cut interest rates in March to an all-time low of 0.5 per cent in a bid to fend off the economic damage expected to be caused by the pandemic. That was a bitter blow to retirees who rely on fixed income investments or already low interest rates on deposits to make ends meet.

And with some observers talking about more rate cuts to come and even the possibility of negative interest rates, there looks to be little relief on the horizon.

Meanwhile, shares in Australia’s big banks have long been a mainstay of many share portfolios. But in May, some banks cancelled or suspended their dividend payments due to concerns about rising bad loans on the back of the Covid-19-related economic downturn. A raft of other top companies followed suit.

It was another blow to retirees who use dividends payments and franking credits to bolster their incomes. Again, it’s unclear when these blue-chip stocks may reverse their current stance on payments to shareholders.

At the same time, retirees who invested in property to generate income from rent payments face the very real problem of tenants being unable to pay rent due to their own loss of income.

Yet again, there’s no certainty on when the economy will pick up again, allowing jobs, and rent payments, to return to normal.

Add to the above the well-documented falls seen in most superannuation balances over the same period, which have left many retirees reluctant to draw on their super for income.

Although super funds grew for the second consecutive month in May , according to Chant West, the super research house says returns look set to come in near flat for the 12 months to June 30. While that may be a surprisingly good result for workers who still have decades in which their balance will grow, it offers little comfort to retirees who must stretch their balance over decades of retirement, all the while drawing down an income from it.

These factors have combined to take a large chunk out of many retirees’ incomes and leave them with little hope of seeing a better performance from their investments in the near future. Not all are able to fall back on the Age Pension either, due to the peculiarities of Centrelink’s assets and income tests and deeming rate.

Your home may be your income solution

Does any of the above sound familiar? If so, you may be considering selling down some of your investments to meet living expenses at a time when markets are still recovering – potentially the worst time to sell.

The thing is, perhaps you don’t have to. You might not think of your family home as a way to support you through this cash crunch but your house isn’t just your home. It’s a valuable asset that you’ve invested in over many years.

According to Household Capital, an independent Australian retirement funding provider, retired homeowners are sitting on an incredible one trillion dollars in home equity – that’s the additional capital accrued in their property over many years of property price increases. And while there may be some revaluation of property amid the uncertainty caused by Covid-19, it’s unlikely to be significant.

That’s why the government, in its Retirement Income Review, described the family home as part of the “third pillar” of Australia’s retirement funding system, alongside superannuation and the pension. Josh Funder, Household Capital’s CEO and founder, says an increasing number of older Australians are using that often-forgotten ‘pillar’ of funding to support their retirement income.

“The notion that your nest is also your nest egg would be no surprise to the 4.5 million retired homeowners whose home equity is worth more than their superannuation savings,” Funder points out. “It’s a store of retirement savings in its own right and it’s largely untapped.”

That’s the conclusion Marilyn came to, after watching her super balance drop in recent months, adding to the uncertainty she was already experiencing from the possible impact of Covid-19 on her income from a rental property.

“My super was hit hard with the market drop so I didn’t want to draw down from it while it was showing a big loss,” Marilyn, the self-funded retiree whose name we’ve changed to protect her privacy, says. “I have an investment property that I receive an income from and so far they’ve been good tenants and I’ve never had a default on payments but you just don’t know in this volatile situation.”

Household Capital specialises in helping older Aussies use their family home to cover short- or long-term shortfalls in their retirement income through two products: a lump sum taken as a Household Loan or regular instalments called Home Income. This kind of borrowing was previously known as a reverse mortgage but Household Capital’s Household Loan and Home Income have none of the drawbacks old reverse mortgages had – there’s no high interest rate, no restrictions on early repayment and no possibility you can owe more than your home is worth.

Marilyn opted for a mix of a Household Loan and a Home Income earlier this year as an alternative to drawing down on her super while its value was diminished or selling her investment property.

“A friend has a reverse mortgage and it works for her, that’s how I knew about that possibility,” she says. “It’s a good option for people who aren’t eligible for a part-pension.”

“It just means I have more flexibility in my options and it’s very reasonable because I retain my home, my investment property and my super – my Household Loan is just like an emergency measure to act as a buffer,” Marilyn adds.

Access your home equity quickly and easily

With many self-funded retirees in the same position as Marilyn – experiencing a sharp drop in income but having assets that prevent them receiving the pension – Household Capital is offering ‘accelerated access’ to home equity. This is available in two forms –  a $20,000 Top Up or a Home Income income stream. The $20,000 Top Up gives you flexible access to your home equity. It might be used to pay your rates or body corporate fees, for general living expenses or to help kids or grandkids who have lost jobs in the pandemic. Or you might choose to put it aside for unexpected expenses.

Those retirees with modest income needs, who need to borrow an amount equal to less than 1 per cent of their home equity per year, may qualify for accelerated access to a Home Income. Household Capital’s Home Income provides a regular fortnightly or monthly income stream to improve retirement funding. Retirees can set up a long-term funding solution or take a short-term income to see them through this challenging period.

“We don’t want people to have to wait – they need access to their savings to meet their current needs as well as fund their long-term retirement,” Funder says.

Funder notes that this is in contrast to the help available from the government’s Pension Loans Scheme, which is only available to people who qualify for a pension, can have a longer waiting period than the two weeks it takes to get a $20,000 Top Up, and from which payments are only available in twice-monthly instalments.

It’s also worth knowing that Household Capital charges a competitive interest rate and operates on the same principles of accrued interest as the Pension Loans Scheme. The graphic below explains how accrued interest works.

And when the economy recovers, dividend streams pick up and life returns to the ‘new normal’, there will still be a role for using home equity to enhance your lifestyle (and income) in retirement. Funder says a Household Loan can be used for many purposes, from providing financial help to adult children to home renovations or funding the cost of home care or aged care.

“We have certainly experienced a surge in enquiries in the last couple of months, so I think retirees who are now spending more time at home than before are realising the value of their home, seeing where they can make improvements or accommodate their future ageing needs, so they can remain in their home for longer,” he says.

“It’s becoming clear to retired Australians that their homes are both the best place to live as well as the best way to fund their retirement.”

HOUSEHOLD CAPITAL INFO 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.

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