Keeping Retirement Simple – Part 9

If you’re fortunate enough to own your home – about 3 of 4 of our clients do – then you have a great opportunity to consider what role your house plays in your retirement plans.  For Australians overall, housing is their largest single source of wealth, well ahead of superannuation.  Some think of it as the “fourth pillar” of our retirement system…and there are a number of possibilities for using your housing asset to improve your retirement.  

So, Principle #9 in our Keeping Retirement Simple series is: Think about your house as a part of your retirement strategy as well as a nice place to live.  

The Home and Retirement

Owning your own home has numerous advantages in retirement:

  • You don’t have to pay rent – so it should reduce your outgoings as long as maintenance and any interest costs are under control.  
  • Many people want to age in their own home and ownership provides the assurance that you can do that.
  • An owned home (your primary residence) doesn’t count as an asset for the Age Pension …so you can have a highly valuable asset without having your pension reduced.
  • Over Australia’s history, housing, while subject to some down periods, has been a remarkable store of wealth and growth.
  • Housing can serve as an asset to borrow against – providing a potential source of income or emergency funds when needed.

Different views about the home

Seniors’ attitudes to housing in retirement vary.  Many people think of it only as a “roof over our heads” and don’t think about the financial implications or how it might help out in retirement.  Others think of it as insurance against a rainy day.   They think… “well, there’s always the house.” Or  “If something goes wrong with my investments, I can sell it.” Or “If I need to move to Aged Care I can use it to fund the Aged Care deposit.”  Others think of it as a legacy … “I can leave to my kids, something to pass down to the next generation.”  And then some people think about it strategically as part of their retirement plan.  “I’ve got this valuable asset; how can I use it to create income to fund my expenses?”

The chart below shows the very interesting results of Vanguard Australia research on how retired Australians view the home:

Source: Vanguard Investments Australia: How Australia Retires 2024 

Your home can help fund your retirement

What’s perhaps surprising is the relatively small number, seven percent, who think of using their home to create retirement funding.   Given the extraordinary increase in the value of housing, many Australians are “asset rich” and “income poor.”  Locked up in the value of their home is a source of income available to be tapped. Let’s talk about that. 

There are a couple of ways you can turn this major asset into income.  The first is selling the home or downsizing.  Many people find their houses are much bigger than they need – once the kids are gone.  They might want to downsize (like I did).  Buying a smaller place or moving to an apartment may free up cash to invest to earn income.  Although we hear many people end up changing houses but spending as much on the new place as the old one; it’s just different.  

But if you do downsize, and you’re over 55, there’s now the opportunity to make a downsizer contribution to super for up to $300,000 or $600,000 for a couple.  One of our Understanding More About Super Consultations can help you to assess if this could benefit you.  

That’s a really useful way to top up your super, if that’s your objective.  If you’re on the part Age Pension, you do need to be aware that increasing your super increases your assets and deeming for purposes of the Assets and Incomes test and so is likely to lead to a decrease in your Age Pension.  Remember under the assets test, for those on the part Age Pension, every extra $1000 in assets leads to a reduction of $78 per year in the Age Pension payout.  Income is also deemed on your super balance so you might also be impacted by the income test.  

A second way to use your home as part of your retirement strategy is to get access to the equity you have in your home.  The most common way to do this is through a reverse mortgage.  This is a loan backed by the equity in your home.  You’re able to borrow a portion of the home’s value and not have to pay interest until the house is sold.  You retain the right to stay in your home and you are typically assured of no “negative equity” – that you won’t be penalised should the loan come to exceed the value of your property.  

Reverse mortgages can be used for multiple purposes.  Some people use them to fund lump sum expenditures, like a renovation or a new car.  They can also be used for topping up regular income.

Reverse mortgages are available from both the government and from private providers (such as Household Capital). The government’s program is called the Home Equity Access Scheme and is available to those of Age Pension age (67) – even to people who don’t qualify for the Age Pension.  The Scheme allows regular payments up to 150% of the Age Pension rate – which includes any Age Pension entitlements.  So, if  you were already on the full Age Pension, you could get another 50% of the Age Pension rate.  If you’re not on the Age Pension, you could be eligible for one and a half times the full Age Pension rate. 

Currently, the government’s Scheme has a very low, probably unsustainable, interest rate of 3.95%.  Private offerings of reverse mortgages have a much higher interest rate.  However, they often offer much more flexibility and choice.  So, you can shop around and find what might work for you.  

A third way to potentially increase your income for retirement applies to those people who have a mortgage.  We find about 15% of Retirement Essentials clients still have a mortgage going into retirement.  

If you’re on a part Age Pension, and have a mortgage, you may be better off by paying down the mortgage with your super or savings.  Doing that reduces your assets which count against the Assets Test and may qualify you for more Age Pension.  Again, for a part pensioner, reducing assets by $1,000 increases the Age Pension by $78 per year.  Retirement Essentials offers an Understanding Your Mortgage consultation which can help you think through your options.  

So, there are a number of ways your home can help you in retirement.  It deserves some thought on what works best for you.