Downsizing and Accessing Home Equity

In 2021, 81.9% of individuals aged 70 to 74 owned their home, according to the Australian Institute of Health and Welfare‘s analysis of ABS data. For many, their home represents a significant portion of their wealth, which can impede their lifestyle needs or create challenges in funding care. Clients might consider accessing their home equity through various strategies such as downsizing, utilising the Government’s Home Equity Access Scheme, or taking out a reverse mortgage with a commercial provider.

Downsizing the Home

Updated 23 May 2024

Downsizing can be a strategic move for various reasons:

• Their current home may be too large or cumbersome to maintain.
• A spouse might have moved into residential care, prompting the non-care spouse to relocate closer.
• A desire to be nearer to family and support networks.
• The appeal of living in a retirement community.

When contemplating downsizing, clients must account for the transactional costs associated with selling one property and purchasing another, including real estate agent fees, stamp duty, legal costs, and relocation expenses. Typically, clients aim to purchase a less expensive home to free up equity. However, this isn’t always the case. Sometimes, a newer, better-equipped home in a desirable location might cost more than the sale price of the original property.

If equity is freed, the excess funds can be invested, used for cash flow, care needs of a spouse, or to pay off debt. Financial analysis is crucial here, as excess funds may impact Centrelink/DVA income support entitlements.

If the new home is pricier, clients will need to liquidate other assets to cover the difference. They must evaluate their long-term financial needs, including care, capital gains tax, and transaction costs from cashing assets.

Centrelink/DVA Assessment of Sale Proceeds

When selling their home, if clients haven’t yet bought a new one, the sale proceeds intended for purchasing a new home can remain an exempt asset for up to 24 months. During this period:

• The client remains a homeowner.
• Sale proceeds meant for a new home are exempt assets.
• These proceeds are assessed at the lowest deeming rate under the income test.

This exemption doesn’t apply to a single person moving into aged care or a couple if both are in aged care, where the proceeds become immediately assessable.

Home Equity Access Scheme (HEAS)

Updated 19 March 2024

The Home Equity Access Scheme (HEAS), previously known as the Pension Loan Scheme, is a government-offered reverse mortgage. It allows individuals of pension age to draw equity from their home (or other Australian real estate) as fortnightly payments, enhancing cash flow to meet living expenses or aged care costs.

Eligibility Requirements

Applicants must:

• Be of age pension age or older (or have a spouse who is).
• Own real estate in Australia that can be used as loan security.
• Ensure the property used as security is adequately insured.
• Not be bankrupt or under a personal insolvency agreement.

Self-funded retirees are eligible if they meet basic eligibility rules for an age pension, carer payment, or disability support pension.

Interest Rate and Repayments

The HEAS interest rate is 3.95% per annum, lower than commercial reverse mortgage options. Repayments are optional, allowing the debt to compound and increase over time. Full repayment is required upon selling the home or upon the client’s death, unless their spouse continues living in the home.

Security Requirements

The loan must be secured against Australian real estate, including property co-owned with others or owned by a private trust or company. Adequate building insurance, covering at least 90% of the market value, is mandatory. The government will register a caveat over the property, with associated costs added to the loan balance.

Borrowing Limits

Eligible clients can borrow up to 150% of the maximum applicable age pension. The amount borrowed is also subject to an assessment of the remaining equity in the home.

Example Calculations

Phil, a single age pensioner receiving the maximum fortnightly age pension of $1,116.30, can borrow up to $558.15 per fortnight.

Dianne, a single age pensioner eligible for a part-age pension of $450 per fortnight, can borrow up to $1,224.45 per fortnight.

Peter and Sheryl, a couple receiving a part-age pension of $352 per fortnight each, can borrow up to $910.10 per fortnight each.

Maximum Payment (Equity Assessment)

An annual maximum allowable loan balance is calculated using an age-based factor and the property value. For instance, if Phil, aged 70, has a home valued at $600,000, his maximum loan balance would be $184,800. No further HEAS payments can be borrowed if the outstanding loan equals or exceeds this amount.

Lump Sums

Clients can borrow lump sums to address short-term capital needs. Up to two lump sum advances are allowed within any 12-month period, capped at 50% of the maximum annual age pension rate.

Opportunities

The HEAS is a valuable strategy for asset-rich but income-poor retirees. It can help meet living expenses or fund aged care. For instance:

• Home Care: Increased cash flow can pay for home care services while awaiting a Home Care Package or supplementing it.
• Home Renovations: Clients moving into residential care needing funds for home renovations can benefit from lump sums.
• Residential Care: Fortnightly withdrawals can address cash flow shortfalls, making the HEAS a cost-effective option if other income or capital sources are unavailable.

Financial advisers authorised under an AFSL can advise on the HEAS without needing authorisation under an Australian Credit Licence, as confirmed by ASIC in December 2022.

Reverse Mortgages

Updated 19 March 2024

Clients without sufficient cash flow to pay for aged care fees may need to borrow funds via a reverse mortgage, either as a lump sum, monthly drawdowns, or short-term bridging finance. This can help cover aged care accommodation costs without selling the property or making loan repayments.

Advantages and Disadvantages of Reverse Mortgages