A change is playing out in retiree households across the nation. One that is barely discernible but will have major repercussions for a generation of retirees to come.
And that’s the change in home ownership status for Australians as they exit the workforce. Once it was a safe bet that a retiree would fully own their own home. Now, as 55-59-year-olds approach the first major retirement goalpost (age 60, or Preservation Age), there’s a 50% chance that they are still paying off a mortgage.
Still having a home loan is something that may or may not be manageable as you move into retirement. So what are your options?:
- You might choose to sell, but that may mean leaving a familiar, preferred neighbourhood.
- You might downsize, but costs of selling and repurchasing can sometimes negate any profits on the sale.
- Or if your super is substantial enough, you might use that to pay down your loan, but that may mean no savings to top-up Age Pension payments when you are no longer working. Which brings us back to the topic of asset-rich, cash poor.
The steady increase in retirees with mortgages has seen a rise in both government and private equity access schemes. Statistics provided by the Department of Social Services to Retirement Essentials late last year show the government scheme (described below) has gone ahead by leaps and bounds since it was introduced, with participants (over the previous 12 months) increasing from 9750 in June 2023 to 13,479 in June 2024.
Today we consider the two most popular ways of accessing home equity, their features and benefits and how they compare. These two forms of home loan are:
- The Australian Government Home Equity Access Scheme (HEAS)
- Reverse Mortgages (provided by private institutions).
Typically retirees accessing the equity in their homes do so for the following reasons:
- To top up existing retirement income to have a more comfortable lifestyle
- To reduce debt
- To lend to family, often adult children as a ‘Bank of Mum and Dad’ lender
- To travel
- To renovate or maintain the family home
What is the Home Equity Access Scheme (HEAS)?
Formerly known as the Pension Loans Scheme, it was first introduced in 1985. It had very low take-up initially as it was for pensioners only until 2019 when it became more widely available. It is now offered to all retirees over the age of 67 (i.e. not just those on the Age Pension), as long as they meet the conditions of age, the time they have owned their home and that the home is in Australia.
Features include:
- An extremely low fixed interest rate of 4.35% (currently below the earnings rate for many cash deposits)
- Government guaranteed and managed
- Borrowings can be in fortnightly payments or lump sums
- There is a no negative equity guarantee so you cannot borrow more than your property is worth
How do Reverse Mortgages work?
Reverse Mortgages have been offered in Australia for 50 or so years. Originally based upon financial products from the United Kingdom, their design and implementation was problematic. A newer generation of Reverse Mortgages are now in place, also subject to the no negative equity guarantee, which means you cannot borrow more than your home is worth. The amount you can borrow varies, according to your age, roughly equalling 25-30% of the net value of the property.
Features include:
- Most property owners are able to borrow more funds using a Reverse Mortgage than with HEAS as it is based upon a percentage of net property value (not 150% of the Age Pension)
- Interest rates are higher – currently from 8.75-9.5%
- Such loans can be made directly with the lender or you may choose to use a mortgage broker
How does HEAS compare with a Reverse Mortgage?
| HEAS scheme | Reverse Mortgage | |
| Provider | Australian Government through Centrelink | Private lenders (listed on ASIC Moneysmart website) |
| Is there a borrowing limit? | 150% of maximum rate of Age Pension | 20-35% of net value of your home depending upon your age |
| Current indicative interest rates | 4.35% | 8.75% – 9.5% |
| Interest is capitalised, so the loan value will increase over time (unless you pay the interest during the course of the loan) | Interest is capitalised, so the loan value will increase over time (unless you pay the interest during the course of the loan) | |
| Age requirement | Age Pension age – 67 or older | Usually 60 or older, may be 55 for newer providers |
| Lump sum or regular payments | Both, but lump sums limited to two per year | Both |
There are other forms of loans for older Australians, including home reversion schemes and equity release agreements, which are also covered in more detail on the Moneysmart website.
Benefits of using home equity
Both the above schemes allow you to remain in the family home if that is your preference. Remember also, that the value of typical homes in suburban Australia are three-four times the value of median super savings. And that across the years, residential property prices have tended to go up. So that means that even though you borrow against your home, steady increases in house prices could mean you still own a very high proportion of your asset.
For some cash-strapped retirees, home equity access could be just the top-up they believe they need to lead a less frugal existence. Or to free up funds for health or discretionary ‘big ticket’ items. However, using the money in your home is a major decision, not one to be taken lightly. It’s also important for any beneficiaries to understand that they may not receive the full value of your home when you pass away.
How much do such loans end up costing?
Both the HEAS scheme and reverse mortgages are offered on the assumption that you are unlikely to pay back monies borrowed. So your debt will compound over time, based upon the interest rate you are charged. When the property is sold or you pass away, an adjustment is made to pay the lender the compounded debt, and you or your estate receive the balance.
The actual cost of the loan depends upon:
- how much you decide to borrow,
- how you receive the amount you borrow (a lump sums cost more than regular payments),
- the interest rate and fees (for example, loan establishment, ongoing fees, valuation) and
- the length of your loan.
Projecting the cost of your own loan
The ASIC Moneysmart website has an excellent calculator which allows you to project how much a reverse mortgage will cost, in dollar terms and as a percentage of your home equity.
Here’s an example of how a couple might use the Moneysmart calculator.
Charles is 70, Maria is 65 and their home is worth $947,000 (median capital city valuation). They want to enjoy life a little more, but feel they are living on a restricted budget that allows for little fun.
The Moneysmart calculator was used to research the longer term cost of a loan. Based on Maria’s age, the most they can borrow is 25% of the value of their home: $236,750. The minimum is $20,000. Their preference is to take $100,000 in a lump sum.
They allow $1,500 for loan set-up fees and use a market interest rate of 9% (instead of the Moneysmart calculator’s default interest rate of 7%).
In 15 years, if their property goes up in value 3% each year, it will be worth $1,475,395. They will own 76% of their home ($1,118,750) and owe the lender 24% ($356,645).
They think this is reasonable, but with such large amounts of money at stake, they decide to seek financial advice.
Next steps
This is a big decision. Most lenders require you to have legal advice before you sign the contract. Some also insist on financial advice – or at least recommend it.
It’s critical that you:
- understand all terms and conditions on any home equity release product you are contemplating – you actually have to read and understand the fine print
- you have checked any Centrelink ramifications
- you are comfortable with the increasing size of such a loan, due to the compounding of interest
In the case of reverse mortgages, it is extremely important that you do your homework thoroughly, seek relevant advice from an appropriately qualified and accredited reverse mortgage consultant as well as independent legal advice. Ensure that you have considered all aspects, including the implications for your family, of the use of your home equity to further fund your retirement goals.
The Retirement Essentials advisers can assist you to understand how the HEAS scheme works, how any extra funds can supplement your existing income and the potential impact on your overall financial position. This can be achieved in a Retirement Strategy consultation.
Do you believe accessing home equity will help you to live a better retirement?
If so does the HEAS or a Reverse Mortgage look more appealing?
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.
