Home equity – uncommon ways to fund your retirement
Key takeaways:
- What is a reverse mortgage
- What is the Pension Loan Scheme (PLS)
3-minute read
For those who have ever owned their own homes, we all know the pain that comes with mortgage and interest repayments. The long years of chipping away at the mortgage to the day that it is eventually cleared can take multiple decades.
So does it make sense to redraw that mortgage or home equity when you cease work and start your retirement journey? This should be the most relaxing time of your life, doesn’t seem to make sense that you would start borrowing money. Well for many, unfortunately, the sad reality is that they will deplete their super, and receive government support that is well below what they need to maintain their retirement expenses. So can one go about funding emergency expenses such as car breakdowns and home repairs when these occur? Or how are they able to increase their income with no extra super or government support?
Reverse mortgage A reverse mortgage allows a person to borrow money in the form of an income stream, line of credit, lump sum or combination, using their home equity as security for the loan. Limits apply so that at age 60, the maximum amount that can usually be borrowed is 15-20% of the home’s value. Generally, 1% can be added to this each year over 60 meaning that at age 65, the most which can be borrowed is 20-25%. Interest compounds on the loan and the full amount (plus interest and fees) is repaid when the home is sold, although early voluntary repayments can be made. Interest is usually higher than a standard home loan and due to compounding, the total owed can become significant.
Pension loan scheme (PLS) The PLS is a form of reverse mortgage that has been offered by the Australian government for the past 35 years. least age pension age and meet certain qualification criteria to access some of the net equity they’ve got in property, typically their home. They can draw down on this equity each fortnight to top up their age pension or other forms of retirement income support (e.g. superannuation or other investments). The PLS allows them to receive up to 150% of the full-age pension rate, less whatever age pension they receive. For example, a full-age pension couple can receive an extra $718 a fortnight (roughly $18,670 a year) on top of the age pension. A self-funded retiree couple can get upwards of $2,154 a fortnight (close to $56,000 a year) which Mr Rogan notes is quite a significant bump to other income sources.
As mentioned, a benefit of any reverse mortgage, including the government form (PLS), is that no repayments are required to be made, but the flipside of this is that interest will compound on the outstanding loan. Mr Rogan says that this compounding can occur in the future (potentially for decades) which can lead to a significant erosion of the net equity in somebody’s home.
If you would like to learn more Please speak to our financial advisers and financial planners who service the Yarraville, Seddon, Williamstown, Altona and Maribyrnong areas.
