If you think rent money is dead money, it may be time to think again. Firstly, even if you intend to buy your retirement home, renting beforehand can be a good way to try before you buy. And if in doing so you realise that the location, community or any other aspect means that this is not the place for you then what you have paid in rent will likely have been a good investment when compared with the costs of selling your home twice!
But there are a whole host of other reasons why retirees may want or need to rent their home in retirement.
For starters, while many people aspire to property ownership and some would say that Australian’s are property obsessed, there is a significant cohort of Australians — approximately one third — who are renters. As you might expect, that number is heavily skewed towards the under 35 age group, and there are variations across the different states and territories but for people aged 55 to 64 years, there are around 21 per cent who are renting their current home. For some of these people, it will be an investment decision, putting the money that would have spent on a mortgage into shares or other investments, but for many, it will be because they simply cannot afford to buy a home in that location. It is probably safe to assume that for the majority of these people they will either need to or choose to continue to rent in their retirement years.
There is also a growing number of people entering their retirement years with a mortgage over their home. In fact, almost half of all homeowners aged 55 to 64 years have a mortgage (47 per cent), which is nearly three times the number it was back in 1990 (14 per cent). With interest rates at historic lows, you could argue that the ability to service a mortgage has improved but this needs to be tempered against the drop in income most people entering retirement are seeing as a result of the loss of their salary, falling returns on investments, including superannuation funds and a maximum age pension entitlement of $944 per fortnight. For some, the strategy may have been to use their superannuation funds to pay out the mortgage, which may not be possible with recent market volatility. The solution may be to sell the home, repay the debt and rent.
Some people’s idea of retirement is to cut off the shackles of the family home and travel or spend some of the year where it is warmer to avoid the depths of winter particularly in the southern states or to be close to family or friends for an extended period. For these people, renting gives them the flexibility to move as their needs, or the weather, change.
While the most affordable housing is an unencumbered home, renting can certainly be a more affordable option than paying a mortgage and other expenses associated with homeownership. Renting obviously saves on the costs associated with loan repayments, it can also save on other costs associated with homeownership such as rates, building insurance, strata levies, renovations and maintenance costs. Renting can also provide you with a greater choice of location, particularly if you are looking at moving to an area, like Sydney, where property prices are high.
In addition to the private rental market, retirees have the option of renting in a retirement community. In some cases every home, unit or apartment will be offered on a rental basis (often called a rental village) in other cases there will be homes, units or apartments for rent within a village that also offers freehold, leasehold or licence arrangements. In these villages there is normally an age restriction, typically at least one member of the household needs to be over the age of 55. In some cases your rent may also include services that the village provide such as meals, cleaning and laundry. Of course, the benefit of renting in one of these communities is that you get the use of all of the facilities which can include a community centre, swimming pool, bowling greens, tennis courts, cinema, barbecue facilities to name a few as well as the company of people looking to share a similar lifestyle and the safety and security that comes with living in a village. It is not uncommon for rental arrangements within a retirement community to be set based on a percentage of the age pension plus rent assistance as they know that many retirees will be relying on this for the majority of their income.
Releasing some equity, paying off debts and having the flexibility (and potential cost savings) that comes with renting may be a good plan but if you receive a means-tested pension such as the Age Pension it is important to understand the impact of this decision on your pension entitlement and other benefits. If you are a forever renter who has been receiving an income support payment and rent assistance transitioning to the Age Pension could see your payments increase.
There is some good news, as a non-homeowner the amount of assets you can have (called the asset threshold) before your pension starts to reduce is $210,500 higher than as a homeowner. For a single non-homeowner, the threshold is $473,750 and for a couple, it is $605,000. Your assets include your investments, caravans, cars, boats, furniture, artwork etc and once you reach age pension age (currently 66) your superannuation is also included in your assessable assets.
Rent assistance is paid in addition to the pension for people who rent their home and pay more than a minimum amount of rent. To be eligible to claim rent assistance you will need to be paying at least $124.60 per fortnight in rent if you are single or $201.80 per fortnight as a couple. Rent assistance is a very generous payment, with each dollar of rent in excess of the threshold attracting rent assistance at 75c per dollar. Of course, it is not unlimited. The maximum amount of rent assistance you can claim as a single person is $139.60 per fortnight and for a couple, it is $131.60 per fortnight (combined).
There is a lot of negative press about renting but there are a growing number of people choosing to rent and it’s easy to see why.