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The Revised Pension Loans Scheme compared to a conventional reverse mortgage

Much has been written about the recently revised Centrelink Home Equity Access Scheme (HEAS). It is a government-funded reverse mortgage loan that offers eligible seniors (not necessarily pension recipients) increased pension payments advanced as a reverse mortgage loan.

 

Borrowers must be property owners and the loan is secured by a caveat over their home, or an investment property.

Some articles have incorrectly stated that eligibility is restricted to Australians of Age Pension age who are currently receiving an eligible pension. This is not the case – You do not have to be receiving a pension to be eligible for the HEAS.

The loans are administered by Centrelink and are offered at a low interest rate, (currently 3.95%) and the loan funds are advanced as extra payments on a fortnightly basis. For a single person a borrower could access $538.35 p/f, whilst a couple could access $826.70 p/f. (as at 20 th Sept 2023).

Access to a HEAS is now available as a lump sum, but cannot be greater than the combination of 26 fortnightly payments – $13,997.10 for singles and a combined $21,494.20 for a couple.  As with conventional reverse mortgage loans, the loan amounts received are not taxable. Centrelink regards reverse mortgage funding as a drawdown on capital, and assesses the funds on what use is made. They can be assessed in both assets and deemed income calculations.

Conventional Reverse Mortgage

The maximum loan amount with a conventional reverse mortgage is based on a formula of age and property value, starting at 15% of property value at age 55 and increasing by 1% per year of age, up to 45% at age 90. There is no maximum dollar amount on conventional reverse mortgage loans. Both loans require a property valuation and borrowers pay for establishment fees and charges.

Summary.

The Home Equity Access Scheme offers pensioners (who only require extra income on a fortnightly basis, or a small lump sum), a lower cost option to obtain those funds. Payments are limited to the difference between the amount of pension they are currently receiving and 150% of the full pension rate.

People requiring higher income funding (i.e. more than the fortnightly payment available for the HEAS, or the small lump sum) or larger lump sum payments will need to apply for a Conventional Reverse Mortgage loan.

Would you like to find out the options available to you? Contact your local Retired with a Mortgage advisor  today for a free discussion on how you can better meet your financial requirements in retirement.

Are you receiving the correct pension payments?

Age Pension eligibility is calculated by a means test assessment.

Both income and assets are assessed by Centrelink/DVA in order to determine eligibility and payment amounts.

The current maximum age pension payments are

Single $1064.00 per fortnight

Couple $802.00 each per fortnight

Income assessment

Recipients are able to earn $204.00 per fortnight for singles ($360.00 for couples) before a reduction can be applied to payments. Payments are reduced to zero when annual income reached $60,632 for singles and $92.768 for couples.

Assets assessment

Home-owners can have a maximum of $301,750 assessable assets ($451,000 for a couple) before pension payments are reduced. Payments are reduced to zero when assessable assets reach $656,000 for a single ($986,500 per couple)

Applicants who fail the income test for any pension payment may qualify for the Commonwealth Seniors Health Card if the income is between $60,632 and $90,000 for a single. ($144,000 combined income for a couple)

Are you receiving your correct payments?

Downsizing for Seniors

From 1st July 2022, homeowners selling their home that has been owned for more than 10 years, can contribute up to $300,000 (per person) into a superannuation fund. But is it a financial advantage?

 

The first consideration is the age pension and the second is property growth rates. Any amount contributing to a super fund for an age pensioner will be considered as an asset. This may affect pension entitlements.

Let’s look at the following 2 scenarios.

A 69 year old Single lady wants to fulfil her retirement years and is looking to use the equity in her home to enhance her later years. She is planning to sell her home for $1.4m and currently receives the full aged pension of $987.60 (eff. 21st March 2022). She intends to buy a two bedroom unit for $1.1m including costs. She would be left with $300,000 – the maximum she can contribute to super. Her current assets are home contents $10,000, car valued at $18,000, cash at bank of $25,000 and $65,000 remaining in super.

Whilst her super will give her additional access to living out her dreams, there are two adverse effects in making this decision

  • The growth in her future unit home will be far lower than the current freehold property. If the freehold family home grows at 5% per annum, after 10 years the property is forecast to be valued at $2.28m. If the growth in a unit is around 2%, the property is forecast to be valued at $1.34m. For comparison purposes, the difference between the options is forecast to be $940k.
  • Age pension impact – As super would become an assessable asset, it is forecast that the current age pension of $987 p/f would become $545 p/f – a reduction of $442 p/f ($11,492 per annum). This lower payment would reduce further, when deeming rates are increased into the future.

A Couple aged 69 and 67 are retired, have a home valued at $2.0m and looking to downsize and  buy an apartment valued at $1.4m including stamp duty of around $65k. This sale would allow them to put the maximum of $300k each into super. They currently have $340k in super, cars valued at $28k, home contents of $10,000 and cash reserves of $22,000. They each receive the full age pension of $744.40 p/f. ($38,708 per annum)

Whilst their super will give them additional access to living out their dreams, there are two adverse effects in making this decision.

  • The growth in the future apartment will be far lower than the current freehold property.

At 2% growth, the apartment would be valued at $1.63m in 10 years. The freehold family home, increasing by 5% per annum, would be valued at $3.26m in 10 years.

  • As the contribution to super takes their assets over the threshold, they lose their total age pension payments of $38,708 per annum.

Whilst a decision to downsize may be formed around suitable accommodation for “ageing in place” needs, the financial results may lead to a lower asset position into the future.

A reverse mortgage is a strong option in these scenarios. If the purpose of downsizing is for providing additional income, consideration should be given to a reverse mortgage income stream to meet those needs. The result may lead to greater growth in an asset that is not assessable for age pension entitlements.

These scenarios are for illustration purposes only, and readers should contact their Seniors Equity Release advisor to discuss their own circumstances.