What do you do if you’ve reached retirement and you do not have enough capital to fund your costs of living, pay for a holiday, buy a new car or caravan, renovate your home or pay for an accommodation bond?
There are a number of things you can do these days, each with their own benefits, disadvantages and costs and it really depends on your situation and what you want the money for as to what the best choice for you will be.
The main equity release products are reverse mortgages and home reversion schemes. Both are generally only available to those over 60 and are attractive because you don’t have to have an income and you don’t have to make repayments while you’re still living in your home.
On the downside though, they can be quite complex, a little expensive and can expose you in the event that property does not perform to expectations or you breach your contract and are forced to move out.
A Reverse Mortgage is the most common option and allows home owners to take a loan against their home as a lump sum, regular payments or a combination of both. Interest rates tend to be a bit higher than standard mortgage rates (by around 1%) and with no interest repayments being made, the debt can build up quite quickly, so the later you apply for your reverse mortgage, the less you will be impacted. The safest starting point is to control the amount you borrow in the first place, so you create a built in protection. It is also important that you ensure you have a ‘No Negative Equity Guarantee’ contract to avoid the rare instance of owing more than the value of the home when sold; but for those who would like to stay in their own home and have a bit more to spend, a reverse mortgage can present a good option.
The alternative, a Home Reversion Scheme, is currently only available in certain areas of Melbourne and Sydney. With this option, you actually sell a portion of the future value of your home to the scheme provider who will only be paid for their share when you leave the home to enter aged care for instance. The lump sum that you receive is discounted by a rate that reflects your age and your life expectancy and the portion of the home that has not been sold is always protected. The most you can sell is 65% of your home and the older you are the more you can sell.
Centrelink also offers an equity release option called the Pension Loans Scheme. You may be eligible to take advantage of this option if you only receive a part Age Pension, or you do not qualify for an Age Pension due to either the Income or the Assets Test. This scheme allows you to use your home as security and makes regular (but no lump sum) payments. The loan does not need to be repaid until you die or sell, but it can be if you wish in full or in part.
An Aged Care Accommodation Bond Loan provides a solution for senior clients who wish to retain the benefits of owning their own home and at the same time; secure a place in a residential aged care facility of their choice. It enables you to continue to own your home, rent it out to generate additional income, allow family members to move in, or simply have more time to arrange a more orderly sale of the property. It also enables the retention of Centrelink entitlements for a longer period of time.
Again, there is no requirement to make loan repayments over the life of the loan unless you choose to do so. Interest fees and charges are capitalised to the loan and repayment is deferred until the property is sold, the borrowers are no longer living in the house, or the borrower(s) has passed away. Borrowers must be 70 years of age or older and the family home must be unencumbered.
This type of loan is not widely available, is generally for a fixed term of3-5 years and attracts a higher interest rate than standard mortgage rates.
There is now an industry body called Sequal and an ASIC complaints and conflict resolution procedure to help protect the consumer, so whilst Home Equity Release schemes in general have been slow to take off in Australia, there have been a range of protections and improvements that have been introduced to benefit consumers over that time.