Question 1: I own my home, which is valued at $750,000. But I am a pensioner (full). What is the best way to release some capital from my home for a better lifestyle now?
Many pensioners face a similar dilemma. They are ‘asset’ rich, because they own their home, but income poor.
I assume you want to stay living in your current home, and in that case, there are three main options available to you:
1. Centrelink’s Pension Loan Scheme (PLS)
As you are a pensioner and presumably already deal with Centrelink, you can speak with them about their PLS.
It is a form of reverse mortgage that allows individuals to “top up” their age pension. The overall maximum amount of “top-up” payments is 150 per cent of the maximum rate of age pension.
As an example, if you are a single person receiving the maximum payment of $952.70, you can receive an additional payment of $476.35 each fortnight (as at May 2021).
The current interest rate on the PLS is 4.5 per cent per annum. Although this may sound high when compared to a regular mortgage, it is very competitive if compared to a reverse mortgage loan.
The loan can be stopped and/or repaid at any time. But in reality, the loan is generally repaid once the home is sold.
This would be the simplest and, most likely, the most affordable of the available solutions.
2. Reverse Mortgage
Reverse mortgages have been around for quite some time, but in the past they were sometimes inappropriately sold and had little regulation.
These days things are very different, with the financial product much more closely regulated.
Reverse mortgages now have to provide a ‘No Negative Equity Guarantee’.
This ensures the home owner (or their estate) can never owe more than the value of the home, no matter how long you stay in the home.
Reverse mortgages can provide greater flexibility than the PLS, in that they can pay higher ongoing regular amounts and even lump sums.
But the interest rate will generally be higher, and private providers may also charge ongoing fees.
(Please note that the recent federal budget proposed that the PLS will be able to offer very limited lump sums, but this is still to be legislated).
Both reverse mortgages and the PLS offer a ‘Protected Equity Option’, which is optional.
This enables the home owner to retain a portion of the home’s future value upon its sale, but it means they will receive a lower loan and possibly lower ongoing payments.
The Protected Equity Option can be important if you are concerned about leaving an inheritance.
It ensures your beneficiaries receive a minimum predetermined amount of the equity (say 50 per cent), regardless of what happens to the balance of the loan or property prices in the future.
3. Selling a percentage of your home
Instead of obtaining a loan, as you would with the PLS or reverse mortgage, you agree to sell a percentage of your home and receive the agreed funds up front in exchange for selling a future sale price of your home.
For example, you could agree now to sell 30 per cent of your home in the future, i.e. when you want to move or when you pass away.
What you have to understand is that the provider will benefit from any future value increase in your home, but on the plus side you do not have a loan to repay.
As all of the above options would affect the value of your estate upon your death, you should discuss them with your executor and future beneficiaries.
It is also strongly recommended that you seek legal and financial advice prior to entering into any agreement.
Question 2: If I retire after I reach retirement age (say 75 years old) and I still have a mortgage ($50,000), can I still use my super to pay off the mortgage? Will this affect my pension?
One you reach age 65 or over, or if you retire, you can access your super.
At that point you have full control of what you do with your super.
Many Australians now retiring still have outstanding debts.
Since 1990, for home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14 per cent to 47 per cent.
Not surprisingly, then, more people are using some of their super to repay debt.
Some individuals even use most of their super for this purpose but are then left with little income to top up their age pension.
From a Centrelink perspective, taking money from super and using it to pay off a loan can have a positive effect on your age pension entitlements.
This is because super is counted as an asset by Centrelink once you attain age pension age, and if you use the $50,000 in your example to repay debt, then that $50,000 is no longer an asset so is no longer counted in Centrelink’s test.
Depending on your other assets this may increase your age pension payments.
Hopefully you have additional super or other assets that you can use to help supplement your age pension income in retirement after you have repaid your debts.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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