Using your property for financial assistance: Home equity release products

Saving money in retirement for unexpected expenses can be tricky, especially if you’re on an Age Pension or those expenses – especially around health, home maintenance or helping your children with money – are larger than you bargained for.

Or perhaps you feel like you’re just not getting enough enjoyment out of retirement on the income you have and would like to splash out on a once-in-a-lifetime holiday or new car or a caravan.

This is where some retirees consider releasing some of the equity in their home so they have a larger chunk of ready cash to spend, or to invest in superannuation or elsewhere to increase their retirement income.

Home equity is the difference between the market value of your property and the amount still owing on your mortgage or, in the case of no mortgage, the entirely of the value of your home is equity.

There are a few home equity options available for Australians – a reverse mortgage, a home reversion scheme and the new Senior Equity Release scheme and Household Loan product. There’s also the Government Pension Loan Scheme which is worth understanding.  All come with benefits and risks that you should carefully consider before making a decision to release equity from your home.

Taking out a reverse mortgage

Taking out a reverse mortgage means using the equity in your home as security to borrow money, which you repay, plus interest and fees, when you decide to sell your home or when you die and thus leave your home. The amount you’re able to borrow depends on your age, with those aged in their 60s usually able to borrow about 15-20 per cent of the value of their home, compared to those in their 70s who may be able to borrow between 25-35 per cent.

You can choose to receive the money in a one-off lump-sum payment or as gradual payments. As with any financial decision, there are many things to consider.

On the plus side, you don’t have to worry about repaying the loan immediately, with the option to wait until your house is sold. On the other hand, the interest added to the loan as it progresses can be quite steep, so by the time you sell your home, you have have to repay an amount that is considerably larger than the amount you borrowed.

Having extra money in your account could also affect how much pension you receive, or cause you to lose access to the pension entirely. There is a long list of assets that need to be declared when applying for the Age Pension, including property and business interests, personal items such as jewellery and computers, along with privately owned vehicles.

Other assets that can impact your pension payments include retirement village contributions, financial investments, and any income streams, including superannuation income. Assets that are gifted to someone, or sold for less than their worth, may also count towards the assets test.

Another thing to keep in mind is that anyone who is living in the home that isn’t an owner, such as a child or sibling, may be forced to move out of the property if you die, in order for the home to be sold and your loan repaid.

Using a home reversion scheme

A home reversion scheme is another option to help out when you need some extra money. This involves selling part of the equity built up in your home a discounted rate. The exact amount received is determined by your age and life-expectancy.

When the time comes to sell your home, the home reversion scheme provider will receive that segment of equity at the market price of your home. This means you could be selling off future profit and receiving less to put towards your next property or for your heirs to inherit.

Home reversion schemes are regarded with caution by many financial experts so it’s particularly important you seek financial advice before purchasing such a product. And, as with reverse mortgages, any additional money you have on hand could affect how much (if any) pension or other Centrelink benefit you receive.

Senior Equity Release

In June 2019, investment platform DomaCom launched what it calls its Senior Equity Release (SER) scheme, 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 looking to invest.

DomaCom is what’s called a ‘fractional investment platform’, which effectively means that they allow investors to pool their money, decide on which property 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.

The ASX-listed company handles all of the formalities on the property purchase, such as conveyancing and valuation, just as an individual investor would do when buying a property 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 more financially-savvy than offloading a wholly owned investment property.

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’d like to receive their cash from investors as a lump sum or in monthly instalments. There is an annual fee of 1.4 per cent involved, as well as paying ‘rent’ to the investors on the portion of their property.

Investors are guaranteed a 3 per cent return on their investment, via rental payments, while the investors and homeowner share proportional maintenance costs of the home and any capital gain made from an increase in the property’s value.

The Government Pension Loans Scheme

The Australian Government Pension Loans Scheme is a scheme offered by Services Australia that lets Australians that meet a specified criteria get access to a non-taxable fortnightly loan from the Government.  This is often used to supplement retirement income and is seen to be an important tool in funding retirement income in Australia in the years ahead from the enormous wealth sitting in property.

Home equity release products aren’t always suitable

While a home equity release product may be a great option for those needing extra money to cover a lump sum payment such as medical treatment, it’s not always the best option. The Australian Securities and Investment Commission’s (ASIC) MoneySmart outlines a number of circumstances when alternative options should be taken.

ASIC advises against taking out a reverse mortgage or a home reversion scheme if you are wanting to lend money to your children or other family members, or if you want to invest. MoneySmart also advises avoiding home equity release products if there is a potential for further debt.