A 3.95% reverse mortgage from the government is starting to look very cheap.

Sep 22

Written By Brendan Ryan

Key Points

The Government wants you to make the most of the value in your home to support your living costs in retirement.
The way they do this is to drip feed you a loan in addition to your age pension (or instead of an age pension if you don’t qualify for the payment because of your assets or income).
The current interest rate is substantially cheaper than reverse mortgages offered by Australian financial institutions.
The Home Equity Access Scheme can be very useful for retirees with property - in this article we look at this scheme and reasons why it may fit into your plans.

Your situation is unique, and you should base your decision on a full understanding of the potential outcomes.

Brendan Ryan CFP

0412 181 031

Call Brendan Ryan

Introduction

The Home Equity Access Scheme is essentially a government run reverse mortgage scheme, and a reverse mortgage scheme is a way of borrowing against your home.

In the case of the Home Equity Access Scheme, the payment is made as a top-up to your fortnightly age pension (or a fortnightly payment if you are not eligible for the age pension). While there will soon be scope to draw down in larger chunks, the main focus is to help with day to day expenses rather than bigger ticket purchases.

A loan like this is of use to Australians with wealth tied up in their home, but who may not have enough savings to support day-to-day expenses. The ASIC MoneySmart website offers more detail on the pros and cons of such a loan and is worth a read.

This scheme is open to any Australian who may be eligible for an age pension - even if they have assets or income that mean they do not get a payment. Consider a pension age (67) retiree who has an asset of higher value than the asset test limit that does not generate income for them (say a block of land) - this scheme may be used to provide cash for day to day living expenses without selling the asset.

There are a number of situations that can be helped by using this scheme, and generally, many retirees can benefit from at least understanding what is available to know this is something they may use down the track.

Do you need to borrow from the government?

Planning your lifetime spending involves complex decisions. Your spending is going to be a mix of investment earnings, a drawdown of your savings, and support from the government. And don’t forget all the cost savings you may eligible for - it’s going to take a lot of effort to keep organised and make the most of them.

Somewhere down the track, the Home Equity Access Sceheme may make sense to your situation. A drawdown against your home, in conjunction with spending from savings and government support may make sense.

Putting this together can be confusing. We can help.

The ASFA Retirement Standard

The ASFA Retirement Standard is a study of what kind of income is needed to support a retiree lifestyle, and it is worth a closer look when comparing your own spending, and when considering the Home Equity Access Scheme

The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a “modest” or ‘comfortable” standard of living in the post-work years. It is updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.

It is worth considering the ASFA Retirement Standard to Maximum age pension rates. A home owner couple eligible for the maximum age pension would be eligible to receive about $38k pa in pension income. Meanwhile - a “modest” lifestyle is estimated to cost $42k, and a comfortable lifestyle about $64k per year.

This shortfall could be made up by income from savings, drawdown from savings, employment income and value in the home. For many retirees it can be a mix of a few of these sources of extra cash for day-to-day spending.

How far will the full pension and the Home Equity Access Scheme get you?

The maximum rate of the Home Equity Access Scheme is 150% of the Maximum age pension.

This can be very confusing.

If you are on the maximum age pension (e.g single or couple), consider that the loan amount is up to another 50% of the pension.

So if you are on the full age pension, and want the full loan amount* it will be half of your current age pension.

If you are eligible for the age pension, and do not get a payment because of your income your assets, you will be eligible to borrow up to 150% of the maximum age pension rate - so your loan could be up to 150% of the maximum age pension.

This will be confusing for part pensioners, and pensioners seeking a loan that are not eligible for a payment based on the asset and income test.

*There are limits on the amount of loan (in total) based on age and equity in the home. There is detail on how this is calculated on the government website.

It is interesting to look at the ASFA retirement standard, and the potential cashflow for a home-owner that may be getting the full age pension and the Home Equity Access Scheme.

In the case of a single or a couple, the maximum age pension, when topped up with the maximum amount of Home Equity Access Scheme Loan, will result in enough cashflow somewhere between the ASFA standard of “modest” and “comfortable”

What does this mean for you?

It’s worth knowing that down the track, the Home Equity Access Scheme may help offer you income at a rate somewhere between “modest” and “comfortable” if you need it. Better still, you could organise for it to supplement the mix of savings and government support so you have some kind of savings in reserve in case of the unexpected.

This should be part of the planning that goes into your lifetime spending.

It always helps to look at what you are spending now, and think carefully about how things may change in the future.

The reality is that you will never predict with 100% certainty what the future will bring. However, with some thought and a commitment to ongoing adjustment and revision of your plans, you have a much better chance of getting it right.

Later Life Advice can help.

Please call me on 0412 181 031, or email me to discuss your situation.

Brendan Ryan

Certified Financial Planner

Not sure what your next move should be?

Why not start with a phone call? I look forward to talking with you soon.

I am always keen to hear people’s stories and find ways to help.

All of my clients have unique situations, but they want the same thing - to get good value and security from the big companies that help them manage their savings, to make sure they get all that they are entitled to from the government, so that they have confidence in their plans.

More than 25 years experience working in finance, together with a deep understanding of retirement and government puts me in a strong position to help you gain confidence that you are doing the right thing, and that you are well organised in your approach.

Call me on 0412 181 031 or send me an email.

Brendan Ryan CFP