There are schemes that allow retired Australians to tap their home equity to bring in extra money. (Source: Getty)
For many Australians, the family home is the biggest asset they will ever own.
In retirement, it can also be the biggest source of financial security – or financial stress.
Rising living costs, medical expenses, or helping out family can put pressure on the retirement savings nest egg, and not everyone wants (or is able) to sell and downsize.
If moving isn’t an option, borrowing against the home may be.
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Two common options for freeing up cash are reverse mortgages and the Home Equity Access Scheme (HEAS) offered by Services Australia.
Both allow older Australians to unlock some of the value in their home – but there are significant differences.
One notable difference is that reverse mortgages can have interest rates as high as 8% or more, whereas HEAS has a lower interest rate of 3.95% per annum.
Before choosing either, it’s important to understand the trade offs and get independent advice.
A reverse mortgage is a type of loan that allows homeowners, typically aged over 60, to borrow against the family home to get funds, and delay any interest repayments until the property is sold or the homeowner passes away.
Reverse mortgages are flexible in how you access the money. You can:
Take a lump sum – e.g. borrow $250,000 and take a lump sum of $250,000.
Set up a line of credit where funds are available, but you only draw what you need. So, you could have $250,000 available but only draw on $20,000 to pay off a credit card.
Receive regular payments like an income stream.
It’s important to note that each option affects how interest builds up. If you take a lump sum, interest is charged on the full amount from day one. If you draw smaller amounts over time, interest is only charged on what you’ve used – which can significantly reduce the total cost.
Reverse mortgages aren’t generally counted as income for Centrelink purposes, but the money you hold onto can count as an asset. So, taking a large lump sum could increase your bank balance and that may affect your rate of payment.
The Home Equity Access Scheme is a government backed alternative which works similar to a reverse mortgage but usually has a lower interest rate of 3.95% per annum.
To apply, you must:
be of Age Pension age (67 and up) or be partnered with someone over Age Pension age and be eligible for Carer Payment or Disability Support Payment
meet residency and eligibility requirements and
own property in Australia.
You don’t need to be receiving a pension, but you must be eligible for a qualifying pension. You could receive up to 150% of the full Age Pension rate as an ongoing fortnightly payment. Or if you’re already getting a pension, you can borrow between your normal fortnightly payment and 150% of the full rate of pension.
There is lots to consider before taking one of these options. (Source: Getty)
The scheme allows retirees to top up their fortnightly pension up to $1,768.05 for singles and $2,665.50 combined for couples.
You can also take some of the payments as a lump sum advance. Like a reverse mortgage, the loan is secured against your home and is generally repaid when the property is sold or from your estate.
Weighing up the decision and free financial help
Using your home to fund retirement is a major financial decision, so make sure you do your homework.
You can use the government’s MoneySmart reverse mortgage interest calculator to help understand the financial impact interest can have.
There’s also a Home Equity Access Scheme calculator on our website. You can use it to:
I would strongly encourage people to speak to Services Australia’s Financial Information Service to get free, impartial information about the products and how they work.
While this service doesn’t provide personal financial advice, it helps people to improve their financial capability and builds self-sufficiency by looking at financial options beyond the payments we offer.
Call on 132 300 and say the words ‘Financial Information Service’ when asked for the reason for your call.
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