Most retirees own their own homes. A growing number (13%) of those aged 67 and over still have a mortgage. But of those approaching retirement, aged 55-64, a staggering 54% are still paying off a home loan.
In early August we discussed the option of downsizing to a more suitable property. There are lots of financial incentives for older Australians to do so. But research tells us that, as we age, most of us wish to stay exactly where we are, in our neighbourhood, with friends and favourite haunts nearby.
What are the options, then, for those who wish to stay in their current home, but need more income for maintenance or other living expenses?
This is where home equity enters the picture.
Today we explain how accessing home equity can work, the three main types of home equity access and some pros and cons of each one.
One of the most important things about using equity in your home to fund your retirement is how it will combine with other sources of income such as the Age Pension, superannuation, private savings and work.
This is because your primary residence is exempt from the Centrelink means test for the Age Pension. As long as your equity is in this home, it is exempt from any deeming which may increase your calculated income. If you take equity out of the home and it is added to your assets because of the way you receive this money, then it can have a deleterious effect on your overall eligibility. If, however you take this equity as an income stream secured against your home, this is less likely to happen. That’s why it is critical to speak to a professional to test all possible financial outcomes before you make any irreversible decisions.
That said, accessing home equity is becoming increasingly popular for Australians aged 60 and over. Services Australia has reported a year-on-year increase in the government’s Home Equity Access Scheme of 61%, albeit from a low base of 6041 households in 2022.
Let’s take a look at how this scheme, and others, can give you access to extra funding for your retirement journey.
The following information is a summary of more detailed overviews of the three most common forms of equity release. (Further detail is available on the federal government Moneysmart website.)
Your ability to access any type of this funding will be dependent upon your age, the value of your home and the type of equity release scheme you choose to use.
Reverse Mortgages
These loans allow you to borrow money using your home equity as the security. The minimum amount you can borrow is about $10,000 and this is adjusted as you age, for instance at 65 you could borrow about 20-25%. These funds may be withdrawn as an income stream, a line of credit, lump sum or combination of these. As you do not need to pay interest, the amount you owe will compound over time. When you move out or sell the property, the loan is repaid upon your death. There are fees to establish such loans and interest rates are typically higher than variable market rates. It is helpful to use the Moneysmart reverse mortgage calculator.
An important piece of legislation from 2012 protects the holder of a reverse mortgage from ever having negative equity in their own home – i.e. you cannot owe the lender more than the market value of your property.
Home reversion schemes
Also known as home sale proceeds sharing, this is a scheme by which the lender will pay you a ‘discounted’ amount for a share of your home. This share is calculated based upon your age as well as other factors. There are many terms and conditions on how much you might get back – and under which conditions so it’s best to really drill down on the detail of the home reversion scheme of most interest to you. Because it is not a loan, you do not pay interest. You pay a transaction fee as well as a valuation fee. If your home increases in value, the lender will benefit on the portion that they have purchased.
Home Equity Access Scheme (HEAS)
Previously known as the Pension Loans Scheme, this is a way of supplementing retirement income by receiving a fortnightly loan from the government. It is not just available for those on the Age and other pensions but also for self funded retirees that meet the relevant age, residency and home ownership criteria. Lump sum payments have also been available from 1 July 2022. This scheme also has a negative equity guarantee. The loan, costs and all interest must be repaid to the government. You can change payments and make repayments at any time. The current interest rate on the HEAS is 3.95% which is very low compared with current variable rates. It is unlikely this rate will remain at this level for much longer. Further detail on the HEAS is available here.
As we covered in the previous article on downsizing, there are many options available for funding your retirement needs. Downsizing or using home equity are only two of them. If you are considering selling or using equity in your home, it’s important to be fully informed. This includes:
- Checking all current entitlements (i.e. before sale or loan)
- Considering ways your current savings and entitlements can be maximised.
- Checking that you are taking advantage of all aspects of superannuation
- Based upon your current spending, checking how long your current funds might last
- Projecting the effect that extra home equity or sale proceeds will have on your entitlements
- Projecting your new financial scenario, including any fees, loan repayments etc.
If you are fully across the above detail then you have done all the right homework and are now ready to make good decisions! One of our maximising your entitlements consultations might help you assess your options.
Is home equity of interest to you?
Have you considered using the equity in your home as an extra source of retirement income?
Or is this not your preferred source of retirement income?
are any of these available for lend/lease arrangement eg with Keyton?
Hi Georgie, thanks for kicking off the comments! To qualify for these arrangements you need to own a property that can be used as security. As such, we are not aware of any lease arrangements that would qualify.