Home economics
23 Jan 2013
Equity in the family home is often a major source of funds for retirement, but using it without losing it to banks, taxes and fees can be complicated. Here are four ways to access home equity.
A retiree’s biggest asset is often their home, and the actual wealth tied up in a home – or equity – is the home’s market value less any debt.
There are many ways to access equity, but four of the main ways are selling, borrowing, using family, and renting. Each approach has its pros and cons, as well as possible impacts on pension payments and superannuation.
Selling
The obvious way to access home equity is to sell. If the home is your ‘principal place of residence’, you don’t pay capital gains tax on the sale proceeds, but what to do with those proceeds can be complicated.
If you put the cash into an existing superannuation account or set up a self managed super fund (SMSF), you need to be aware of the restrictions on how much you can contribute without tax penalties.
According to Ken Raiss, a partner at accounting firm Chan & Naylor, it might be more cost effective not to put money into super if you don’t have much. If your actual income is low enough you won’t pay tax anyway, he explains. Therefore, there is no reason to set up a potentially costly SMSF.
Retirees also need to be careful about how selling a home impacts any Centrelink payments, according to Jason Cunningham, head of accountancy firm The Practice.
“If you sold the house and put all that money into cash, it may impact your ability to get the old age pension,” he explains.
Borrowing
Banks and financial institutions also offer ways to access equity. The conventional method is to borrow against home equity. However, Raiss believes that banks look favourably on serviceability in their lending decisions.
That is, they prefer borrowers to have an income that can service the loan, rather than an asset. “It’s much harder for retirees to borrow money,” he says. “Most aren’t earning an income.”
Reverse mortgages, borrowing against home equity for a lump sum, line of credit or income stream, are increasingly popular. Instead of the borrower making regular payments, the interest and fees are added to the loan balance, which is paid off when you die or sell the home.
They aren’t always the best choice though, in Cunningham’s experience. “I really like to stay away from reverse mortgages,” he says. “They’re really expensive. I don’t feel that the client gets the best bang for their bucks. The banks get a bang for their bucks. I’m not a fan of them at all.”
The Australian Securities & Investments Commission (ASIC) has warned that reverse mortgages, depending on individual circumstances and how retirees use the money received, could also impact Centrelink payments.
Using the family
Cunningham has seen retirees sell their properties to their children and then rent them back. Because they don’t have to pay costs such as agents’ fees they could sell for as much as 10 to 20 per cent below market value without losing out financially.
“The kids get access to the property now and benefit from the property going up in value,” he says. “If the parents are still working they can also look at putting some of the money from the sale into super.”
Raiss says some of his clients borrow money from relatives and, in return, give equity in their home. One option is a contractual will, which guarantees that the relative who lent money will end up with a percentage of the property. “A normal will can’t do that,” Raiss said. “It can be contested.”
Renting
Some of Raiss’s clients rent out their homes. For example, they may live in an $800,000 home that could earn $700 per week rent. If they rent a smaller place to live in they could live off the difference. It could be several hundred dollars; “not a bad income on top of everything else,” says Raiss.
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