The Morrison Government today will relaunch an existing scheme to encourage older Australians to borrow from their home equity to fund retirement. Ning Zhang and Colin Zhang explain the process.
Many Australians have not heard of the Retirement Loans Scheme. Many more assume that it is only for pensioners.
In the Thursday mid-year budget update, the government plans to rename the Home Equity Access Scheme and lower the interest rate.
This scheme, soon to be renamed, can be described as a reverse-mortgage in which the homeowner borrows more against their home each month instead of paying down a monthly home loan. The homeowner then pays off the remaining amount when the house is sold.
Reverse mortgages have been available commercially for some time. However, the number has declined as large banks have withdrawn from the field due to increased scrutiny and compliance costs.
Although the government version is called the Pension Loans Scheme (PLS), it is open to all retired people with homes, not just pensioners. It was created by the Hawke government 1985.
The maximum amount that is available under the scheme combined with the age pension is 150%. This means that a retired person can receive extra fortnightly payments through the scheme to increase their total pension payment to 150%.
The entire amount of 150% can be obtained via the PLS even if the retiree does not have a pension.
The payment stops when the loan balance exceeds a ceiling . This ceiling increases with each year that the retiree ages and grows with the increase in the home’s value.
A 70-year-old with a $1,000,000 home is allowed to live at $308,000.
The PLS is different from commercial reverse mortgages in that its lump sum payments are limited. The PLS payments have no effect on the pension, while commercial reverse mortgages may trigger the means test.
The PLS is not as attractive as it seems. Perhaps 5K, or one in 800, have chosen to take up the PLS.
The government made two changes to this year’s May budget in order to make it more appealing.
One was a no equity guarantee. Even if the property’s value fell, users would not be required to repay more than that amount.
Another option was to be able to take out up to two lump-sums per year , totalling up to half of the full pension and fortnightly payments.
The total government payments would be kept at 150% of the pension.
The second change will not take effect until July 1, 2022. It is expected to be announced again in Thursday’s midyear budget update.
The budget also announced a decision to increase awareness of the scheme through improved public messaging, branding. This is likely to be re-announced Thursday with the new name.
On Thursday, there will be a lower interest rate on amounts borrowed. The rate was reduced from 5.25% down to 4.5% in January 2020 in line with other rate cuts. It will decrease further to 3.95 in January 2020.
Attractive but not without risk
The scheme is not without risks.
One is that you will eventually reach the ceiling if you live too long and are unable to borrow any more money. This can lead to a loss in income.
You will need to pay the amount owed if you decide to sell your house and move into an aged care facility.
There are other risks, such as the fact that neither the home price nor interest rate can be fixed.
The government has reduced the rate in line with lower general interest rates. It might increase it if interest rates rise. Home prices can fall as well as go up. This means that you can borrow as much as possible to cover the home’s value.