Accessing equity advice for seniors
In planning housing and lifestyle options, some people consider re-financing options that allow them to access equity built up in their existing home. Equity is the difference between the value of your home and any amount you still owe on it. These products are known as reverse mortgages or equity release loans.
Reverse mortgages allow you to use the equity in your home to obtain money by way of a loan. Interest is charged as fixed or variable, is compounded, and there are fees and charges just like any other loan except you don't have to make repayments while you live in your home. No repayments are necessary until you sell your home, move out permanently, default on the loan or die. Because of this, reverse mortgages can be attractive to people who have built up equity in their home but who don’t have enough income to pay off a normal loan.
The loan is often between 10-45 per cent of the home's value. Reverse mortgages may be obtained for many reasons, for example, modifying the home, undertaking maintenance or renovations, for holidays or a new car. The money can be paid in instalments, as a lump sum or as a line of credit.
What can go wrong?
Reverse mortgages have advantages but they are complex and there are potential pitfalls you need to consider. For example, a reverse mortgage may impact on your eligibility for a pension.
The debt can rise quickly as the interest compounds over the term of the loan. Your home’s equity is steadily eroded and a large proportion, or all, of the proceeds from the sale of your home may be required to pay off the loan. You may end up with not enough money left for aged care or other future needs.
Some reverse mortgages have wide-ranging default clauses. If you are in breach of one of these clauses, the lender can charge expenses (which could be at a higher interest rate) or ask for repayment of the loan. You may have to sell your home if you cannot repay the amount owed. Default clauses can include not maintaining insurance, not paying rates, or doing something that decreases the home’s value. In a worst-case scenario, you could find yourself evicted, your house sold, and still owing money.
If you are the sole owner and someone lives with you, that person may not be able to stay in the home if you move into aged care or die. Some contracts protect the right of a resident who isn’t a borrower to stay in the house after the borrower/s have died.
If the debt increases so it exceeds the home value, you are said to have 'negative equity’ in your property. The terms of the loan contract can be arranged so that the debt cannot exceed the value of the home. This is called a ‘no negative equity guarantee' (NNEG). On 18 September 2012, the Government introduced statutory 'negative equity protection' on all new reverse mortgage contracts. This means you cannot end up owing the lender more than your home is worth (the market value or equity).
In considering your options, as with any major decision, it is important to:
- get advice from an independent and qualified expert;
- check and understand any contract; and
- discuss your intentions with your family.
Pension loans scheme
Centrelink and the Department of Veterans’ Affairs offer another way to release equity in your home through the Pension Loans Scheme. This scheme allows pensioners on a part pension and some people not eligible for a pension, to increase their fortnightly income by applying for a loan. The loan is paid in fortnightly instalments, to bring the total payment up to the equivalent of the full pension. You cannot apply if you are a full pensioner as you already receive the maximum pension amount.
Under the scheme, real estate you - or your partner - own is used as security for the loan. You do not have to use the full value of your asset as security - you can have a guaranteed amount kept aside from the total value. This ensures an amount of equity is preserved in case you need or want it later.
Interest is charged on the outstanding amount and there are costs for securing the loan.
Extending Eligibility to the Pension Loans Scheme
From 1 July 2019, the Australian Government is proposing to:
- expand eligibility for the Pension Loans Scheme (PLS) to all Australian’s of Age Pension age including maximum rate age pensioners; and
- increase the maximum allowable combined Age Pension and PLS income stream to 150 per cent of the Age Pension rate.
Detailed information from the seniors housing guide.
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