Tapping into home equity
21 Oct 2019
Tapping into home equity.
Can the new Pensions Loan Scheme help you? We break down how it works and compare it with reverse mortgaging.
Reverse mortgages are designed for asset-rich, cash-poor seniors who aren’t ready to sell or downsize their family home. They’re a way to access some of the equity in your home without putting up a For Sale sign. The loan is repaid only when the house is sold or the borrower passes away.
Often, people use reverse mortgages to access a lump sum to pay for renovations or maintenance; fund medical expenses; or even to cover the cost of aged care until they sell their home.
However, there is an alternative for people who want to tap into their home equity to give their income a boost.
From July 1, 2019 the government Pension Loans Scheme (PLS) has been expanded. In the past, it only allowed people to borrow an amount to top up the part pension to the equivalent of the full pension.
Now it allows people to borrow to create an income stream that is 50 per cent higher than the full pension including supplements. That’s up to $17,800 a year extra for a couple on the full pension, or $11,800 extra for a single on the full pension.
To be eligible to access the PLS you must own property in Australia with enough equity to secure the loan, and the property must be adequately insured.
Like any reverse mortgage, the PLS doesn’t charge any repayments until the house is sold
What does it mean?
At the time of the announcement in the Federal Budget in May 2018, Paul Versteege, policy coordinator, Combined Pensioners and Superannuants Association said he expected additional take-up of the expanded PLS would be no more than 6,000 borrowers.
Although PLS borrowings cannot be taken as a lump sum, the scheme has a couple of advantages over the reverse mortgages. At 5.25 per cent, the interest rate is about one percentage point lower than the typical rate charged for a reverse mortgage. There are also no fees, whereas there can be substantial establishment fees – up to $1,000 – associated with a reverse mortgage.
Furthermore, borrowings will not affect any Centrelink benefits, whereas a reverse mortgage can.
Like any reverse mortgage, the PLS doesn’t charge any repayments until the house is sold or the borrower passes away, but this means interest capitalises so you will pay interest on the interest. If you wish to apply for a PLS loan, contact the Department of Human Services (humanservices.gov.au).
Releasing equity
Another way to tap the equity in your property is known as an equity release scheme. In this case, the lender takes a fixed equity stake in the property so that it benefits from any rise in the value of the property.
It’s generally only available to homeowners living in metropolitan Sydney and Melbourne, however, and those who own a house, or an apartment in a block with no more than six units.
The Australian Securities and Investments Commission (ASIC) suggests reverse mortgages are not a suitable option for someone who is spending more money than they earn each year or wants to give money or a loan to a family member.
ASIC has developed a reverse mortgage calculator to show potential borrowers the effect changes in interest rates and property values may have on their home equity. To use it, visit moneysmart.gov.au and search in the “Calculators & Resources” menu.
Since September 18, 2012 there has been statutory negative equity protection on all new reverse mortgage contracts to ensure people don’t end up owing more than their home is worth.
There are a couple of other things to check. For instance, does the arrangement permit someone living in the home who is not the home-owner to stay if the home-owner passes away or moves? Do you need the provider’s permission to sell, lease, vacate or renovate?
As ever, it pays to do as much research as possible and, of course, to arrange an appointment with your financial adviser.
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