Tags: Money. Financial advice. Equity. Retirement.
Preserving the equity in your home is a very worthwhile objective to provide financial security for you as you age. However, if you are over 60 there may be some situations where using your home equity may be an option to consider. These include drawing a small amount each year to supplement your income; drawing a lump sum to pay off a high interest charge credit card; drawing a lump sum for home maintenance or renovations so you can stay in your home; funding a critical medical expense or borrowing to secure aged care accommodation until you sell your home.
Even though home equity release might be suitable for people in the circumstances listed above, keep in mind that it is a long-term commitment and any money borrowed will continue to accrue interest until the debt is repaid or the property used as security is sold. This will result in the equity in your home reducing unless property prices increase sufficiently to offset your borrowings plus interest. Equity release options include the Commonwealth Government Pension Loan Scheme (CGPLS) and a Reverse Mortgage. The CGPLS is quite restrictive.
It is only available to top up your income to the amount of a full pension and not to draw a lump sum whereas a Reverse Mortgage lets you draw a lump sum and or a regular weekly income supplement. You may be able to apply for a CGPLS if you or your partner are of age pension age, own real estate in Australia that you use as security for the loan, your partner receives a rate of payment that is less than the maximum pension amount due to either the income or assets test and you meet the Age Pension resident rules. The amount you get each fortnight from the CGPLS can be up to the maximum rate of income support payment you qualify for.
The total loan you can get depends on the equity you have in the property you offer as security, the equity that you want to keep in your property, your age or your partner’s age whoever is the younger. A CGPLS generally has lower interest charges than a Reverse Mortgage – currently 5.25% compound on the outstanding loan balance. You can repay the loan in part or full at any time.
A reverse mortgage is, as the name implies, a loan that you don’t have to repay until you sell the property that you used as security for the loan. It may seem like an easy option to access money to lessen your money worries but a reverse mortgage it is not something to be entered into without properly understanding the long-term implications of the loan contract. With a normal mortgage, you have to make regular payments to at least cover interest charges whereas the interest charges accumulate with a reverse mortgage resulting in your equity in your home falling. Only a few financial institutions now offer reverse mortgages.
They have generally fallen out of favour for a number of reasons. Reverse mortgage interest rates are typically about 1.5% higher than the normal home loan rate, currently about 6.5%, meaning the debt doubles in about 11 years. This is why the maximum loan is set at only 15% of the property value for someone aged 55 as they may live another 40 years. Most reverse mortgage loans are variable rate exposing borrowers to rising interest rates. Lenders are also concerned about behavioural issues such as cognitive decline, especially given the ages of many of the borrowers.
Heirs to the estate see their asset being whittled away by interest and fees, and lenders worry about their rights being challenged. Beneficiaries to an estate could claim that their ageing parents did not understand what they were doing. So if your circumstances are such that you need a small amount each year to supplement your income, a lump sum to pay off a high interest credit card, a lump sum for home maintenance or renovations so you can stay in your home, funding for a critical medical expense or borrowing to secure aged care accommodation until you sell your home, a reverse mortgage may be appropriate. It may also be an option to consider rather than downsizing to free up cash.
However, make sure you fully understand the implications of giving a lender some control over your most important asset. You also need to understand any potential adverse implications for your Centrelink payments. Check out moneysmart.gov.au for more information.
Peter is a Registered Financial Counsellor at the Bribie Island Neighbourhood Centre. He can be contacted through the Centre on 3408 8440 or by Email at [email protected]. You can make contact if you are experiencing financial hardship or would like general information on financial matters. The service is free.