Noel Whittaker's Blog Rising life expectancies mean more and more retirees are finding themselves asset rich and cash poor. One option is to downsize to a cheaper home, but if they are receiving a part age pension now, converting an exempt asset – the family home – to an assessable asset such as cash or shares could mean a severely reduced pension or even total loss of the pension.
As a result, many retirees take the reasonable view that they are better off to battle along in their present home which, if history is any guide, should continue to give them a reasonable tax-free capital gain.
Taking out a reverse mortgage involves making some significant decisions. If you take a fixed rate there may be hefty exit fees down the track; if you take a variable rate you could suddenly find yourself in strife if property prices fall when interest rates rise again.
Enter the Pension Loans Scheme: a type of reverse mortgage offered by the federal government.
The new rules take effect from 1 July 2019. From that date a couple on the full age pension could receive an additional $684.10/fortnight ($17,786.60/year) between them by way of this loan. It will be paid fortnightly, like the pension, and the interest rate will be a very reasonable 5.25%. The loan can be repaid on demand without penalty, but it would be reasonable to expect that repayment will come from the eventual sale of the family home.
The amount a part age pensioner will be able to borrow will be the difference between the amount of the age pension they receive and 150% of the maximum rate of age pension. For example, if a couple received an age pension of $800 a fortnight between them, they would be eligible to draw an additional $1252/fortnight ($32,552/year) under the proposed system.
The Pension Loans Scheme will be available to non-pensioners too. A self-funded retiree couple will be able to draw 150% of the maximum rate of pension, or up to $2,052/fortnight, combined.
The essence of a reverse mortgage is that no repayments are made on the loan, so it increases faster and faster. So, a valuation from a licensed valuer will be required on the house which will be used as security for the loan. There will be no cost to the applicant for this.
Furthermore, the amount of the cumulative loan debt that can be accrued will be limited based on a number of factors, including the pensioner’s age and their equity in the secured asset.
That’s a welcome move. Think about a self-funded couple who borrowed the maximum loan of $53,352 a year via fortnightly drawdowns. In just 10 years the debt would be nearly $700,000 and in 15 years a staggering $1.2 million. A reverse mortgage is like a strong drug – good in small doses in the right circumstances.