Reverse mortgages: The Pension Loans Scheme

Retirement should be a chapter in your life when you can finally kick back and enjoy the fruits of your labour. Leading up to this point, you worked hard to not only pay down debt, but also accumulate sufficient wealth to generate income to self-fund the retirement lifestyle that you envisioned for yourself.

However, for one reason or another (e.g. financial hardship, unforeseen circumstances, or even failure to plan), some find themselves entering, or ending up in, retirement ‘asset-rich, but income-poor’– with the majority of their wealth tied up in the family home (i.e. an asset that doesn’t typically generate income).

In addition, this situation may be further exacerbated when their other assets (e.g. retirement savings and household possessions) are not only inadequate in terms of generating income to self-fund their desired retirement lifestyle, but also work against them with regards to receiving the Age Pension, in part or in full.

All in all, retirement may prove emotionally and financially stressful for those concerned. As a result, they may find themselves contemplating tough financial decisions in an effort to raise their standard of living, for example, downsizing the family home to unlock and utilise this wealth for income-generation purposes.

Importantly, this approach, as with any financial decision, requires careful consideration. For example, the cost of moving from one home to another aside, if they were a part-pensioner and decided to convert an exempt asset (i.e. their family home) to an assessable asset (e.g. shares, cash, term deposits etc.), then they may find their Age Pension entitlements further reduced or completely lost.

With this in mind, one of the proposed measures in the 2018-19 Federal Budget, has revived discussion regarding the Government’s Pension Loans Scheme. We unpack the finer details of this scheme below.

Pension Loans Scheme

In a nutshell, the Pension Loans Scheme is the Government’s version of a reverse mortgage that offers those eligible an income stream to supplement their retirement income (e.g. retirement savings and/or Age Pension entitlements, where applicable) for a short, medium or long-term timeframe.

The eligibility details

There are certain eligibility requirements that need to be met to apply for the Pension Loans Scheme. For example:

• You or your partner,
  • Are of Age Pension age; and,
  • Receive an income support payment (e.g. Age Pension, Bereavement Allowance, Carer Payment, Disability Support Pension) that is less than the maximum rate or none due to either the assets or income tests, but not both.

And,

• You,
  • Own real estate in Australia (i.e. family home, investment property or real estate owned by a private company or trust where you are the controller of that private company or trust) that you use as security for the loan; and,
  • Meet Age Pension residence rules.

The loan details

The Pension Loans Scheme is a non-taxable loan.

You receive fortnightly loan payments/advances in addition to, or in place of your income support payments (i.e. no lump sums, except for initial legal fees – discussed below). The fortnightly loan payment amount is:

• Up to 100% of the maximum rate of your relevant abovementioned income support payment (inclusive of supplements, such as the Pension Supplement, Energy Supplement, and Rent Assistance, where applicable), minus
• Any income support payment you already receive (if any).

However, you can nominate a lower amount if you wish to do so.

Please note: You can request the Government stop your fortnightly loan payments at any point in time.

Real estate is used as security for the loan. The Government registers a charge with the Land Titles Office on the title deed of the relevant real estate that you have chosen as security for the loan.

Given this, there can be costs associated with the Pension Loans Scheme. Legal fees can be paid immediately by you or added to your outstanding loan balance (and, subsequently attract interest charges).

A licensed valuer will value your share of the relevant real estate (at no charge to you), and the total loan available to you can depend on several factors. For example:

• Whether you own all or part of the property, and whether you have granted a life interest over the property;
• The equity you have in the real estate you use as security for the loan;
• The equity you wish to retain in the real estate (the guaranteed amount); and,
• The age of you or your partner, whoever is younger (for loan-to-value ratio limit purposes).

Please note: This is recalculated every year in January or July, depending on the date of yours or your partner’s birthday.

The loan currently attracts interest of 5.25%pa (calculated on a fortnightly basis, and compounded) on your outstanding loan balance [i.e. the amount you have borrowed + accrued interest + legal fees (if added to the loan balance) – any repayments you have made]. You can make repayments on the loan in part or full at any point in time.

When your total loan amount is reached, your fortnightly loan payments will cease; however, in some cases, they can be re-established, for example, if you wish to change the value of the guaranteed amount that you had initially specified.

Please note: If you want to sell the real estate used as security for the loan then you have the option to transfer the loan to another real estate (e.g. your new home); otherwise, you will be required to repay the loan on the date of settlement. In addition, if there is an outstanding loan balance that remains after your passing then your estate, or in some cases your surviving partner’s estate, can repay the loan.

The proposed measure details

As previously stated above, there was a proposed measure in the 2018-19 Federal Budget that related specifically to the Pension Loans Scheme. For example, pending legislative approval#, from 1 July 2019:

• The eligibility requirements for the Pension Loans Scheme will be expanded to allow participation by those that are of Age Pension age, but:
  • Do not receive an abovementioned income support payment as they have been assessed as having a nil rate of payment under both the assets and income tests.
  • Receive the maximum rate of payment for an abovementioned income support payment.
    • This is because the fortnightly loan payment amount will be increased to,
      • Up to 150% of the maximum rate of the abovementioned income support payment (inclusive of supplements, such as the Pension Supplement, Energy Supplement, and Rent Assistance, where applicable), minus
      • Any income support payment already received (if any).

Things to consider

The Australian Securities and Investment Commission (ASIC) recently released a report* on their review of reverse mortgage lending in Australia, inclusive of the Pension Loans Scheme. Importantly, there are several points worth sharing from this report:

• In general. “Reverse mortgages helped borrowers achieve their immediate financial goals (e.g. stay in their homes, be independent from family, and maintain their quality of life). However, the long-term risks of such a loan were often poorly understood by these same borrowers (e.g. potential financial difficulty later in life due to the effect of compound interest over time).”
  • For example, potential inheritance issues aside, “63% of reverse mortgage borrowers may end up with less equity than the average upfront cost of aged care for one person by the time they reach age 84.”
• Specific to the Pension Loans Scheme. “While this may be a good option for those looking to cover ongoing living expenses and increase their quality of life, it will not meet the needs of borrowers who require an upfront lump sum to cover larger expenses, such as unexpected medical costs or home maintenance and renovations”.

#Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018.

*Australian Securities and Investment Commission. (2018). REP 586 Review of reverse mortgage lending in Australia.