… and mortgage in retirement
Boosting your retirement income is the main aim for most retirees. In this, the second part of our 5-part series on the retirement income pillars, we detail the many ways your family home can offer both security and increased income in your later years.
But first some background on the expanded role of the home as a source of retirement wealth.
Until recently, few considered the home to be inextricably connected with income.
The most obvious benefit of this bricks and mortar asset was the guarantee of secure accommodation until the day you died or chose to head to more suitable aged care. But this benefit has tended to conceal the fact that it is also a source of ‘useable’ wealth. With the exception of the Age Pension, the family home is potentially the highest source of wealth that those aged over 60 possess. Recent estimates underscore this point with median super for men and women hovering at $200,000 and the median house price at retirement age sitting at around $750,000.
And this wealth is now more accessible than ever. Another recent trend is that more Australians than ever are heading into retirement with a mortgage – some 36% in 2016 according to research by financial institution MLC.
Having a mortgage in retirement can be a good or bad thing, depending upon your overall financial situation.
If you are on a low fixed income, you may find it difficult to cover interest repayments after dealing with your regular household expenses.
If you receive a more generous regular income and have a low mortgage, you may find that the earnings from other investments easily allow you to cover the interest.
But your mortgage, particularly if it is an equity access or redraw facility, is a source of capital that can be used in many different ways, including maximising your Centrelink entitlements.
Here’s a simple summary of how this worked for Dev.
Dev is a single homeowner who had a mortgage of $200,000 against his $850,000 regional Queensland home. He was unable to receive a pension as he failed the assets test, having $100,000 above the threshold of $599,750. After a discussion with one of Retirement Essentials financial advisers, he took the decision to pay down his mortgage with a transfer of $120,000 from a term deposit account. His assets and income were both now below the entitlement thresholds, so he has a part pension of $60 per fortnight and the highly valuable Pension Concession Card. His net assets remain the same – he has merely moved money from the term deposit into his home equity, but he is conservatively $5000 per annum better off. He had been been earning interest of $1750 per year on this money, but this didn’t cover his mortgage repayments. With rising interest rates Dev is also happy to just need to manage the reduced outstanding amount of $80,000 in his home loan.
Put simply, there are many ways that you can restructure your mortgage to increase potential Age Pension income.
But here are three things you will need to consider.
- Firstly, as we discussed with the Age Pension last week, home ownership and mortgages are never a ‘set and forget’ proposition. There are many strategies you can employ at different ages and stages before and in retirement. Seeking professional help on a semi-regular basis will help you stay up to day with frequently changing rules and the details you require to best use your most valuable asset.
- Mortgages renegotiation and downsizing can both present strong opportunities to maximise your income. But this is ‘look before you leap’ territory. Make sure you are armed with a list of questions to ask a lender or mortgage broker if renegotiating a current loan. And similarly if you are unlocking the wealth in your home by downsizing, make sure you know all the implications for your other sources of income.
- Any funds which are in an offset account are still treated as an asset. This money does reduce interest costs but is assessable for Centrelink entitlements. Capacity to redraw is not an asset, so some people would be better off to pay off more mortgage and have redraw available.
Other ways to tap into your housing wealth
There has been a marked increase in home equity schemes which allow you to borrow against your home in order to access extra cash to top up your retirement income streams. These schemes can be public or private. The Australian Government’s Pension Loans Scheme (PLS) has recently been renamed the Home Equity Access Scheme. It is a government guaranteed scheme which allows you to take funds as fortnightly payments or (from 1 July) twice yearly lump sums. We covered this in some detail recently.
The current interest rate on offer for this form of home equity is 3.95% however it is likely rising interest rates could see an increase in this.
There has been a proliferation of new commercial home equity schemes in the past few years. Generally speaking they follow the rules of reverse mortgages or can allow you to ‘sell off’ and agreed percentage of your home. There is further detail on these schemes in our home equity loans story.
The typical interest rate for such equity access loans currently varies from 4.98% to 5.25% which could also be affected by rising interest rates.
You will no doubt have noticed that whether private or public, the interest rates on home equity access schemes are higher than market rates for most home loans on offer.
It’s also worth noting that once you’ve left full time work and no longer have a commensurate (5-day per week) salary, getting home loan approval can become quite difficult as, with tighter lending rules, you may no longer earn enough to qualify.
But if trading a portion of your home for a lump sum or regular income payment allows you to supplement your current retirement income by, say, $25,000 or $40,000 or $80,000 per annum, this cash injection may deliver the difference between a frugal retirement and one which is more comfortable and enjoyable. So an equity release strategy is certainly worth adding to the list of retirement income options to discuss with an experienced adviser.
Any discussion of leveraging the wealth locked up in your family home must include and acknowledgement that this is a high level discussion which requires a robust review of all your potential retirement income sources and streams; a review of how the pieces of the puzzle fit together.
There are many ramifications of both paying off, or increasing, your mortgage or accessing home equity. If you wish to learn more about the rules of home equity and how they might apply in your situation, why not book a consultation with one of our experienced retirement income advisers?
If you simply want to check your entitlement use our free calculator.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
