At a time of record low interest rates, home-owning retirees on the full age pension and eligible self-funded retirees will be able to borrow up to $36,000 a year for a single or $54,000 for a couple from the federal government from July 1.
The little-known Pension Loans Scheme, which has been in place since 1985, has been expanded to provide loans to more asset-rich, cash-poor pensioners who own real estate in Australia.
It allows them to unlock money tied up in their homes to help pay for day-to-day expenses through a reverse mortgage. It can help with unexpected medical bills or bridging aged care costs until the family home is sold.
The 0.25% Reserve Bank interest rate cut will leave retirees and other savers $1.3 billion more worse off in the coming year, according to Finder’s insights manager, Graham Cooke.
Under the changes, the scheme will now be open to full aged pensioners and self-funded retirees, whereas it was previously only available to eligible pensioners. As well, the amount available has increased to up to 150% of the maximum fortnightly pension rate.
For example, according to figures modelled by AMP, a single person on a full age pension of $24,000 could borrow up to $12,000 each year, bringing their total cash flow from the age pension and the loan to the maximum $36,000.
With a low reverse mortgage interest rate of 5.25%, it is worth considering the scheme, which is run by the Department of Human Services
How the Pension Loans Scheme works
- The loan is made as a stream of fortnightly pension top-ups, up to 150% of the maximum fortnightly rate of pension.
- Interest continues to accrue until the loan is repaid and increases the amount to be repaid.
- The longer an individual takes to repay the outstanding loan balance, the more they will have to repay over the life of the loan.
- Repayments can be made at any time or the debt can be left, including the accrued interest, to be recovered from the person’s estate.
- It is up to the borrower to manage all the costs associated with establishing, changing and finalising the loan, such as legal fees.
- You have to be of age pension age, or the partner of someone who is, to qualify.
“A reverse mortgage allows retirees to increase their cash flow while staying in the family home. However, it won’t be right for everyone and there are many things retirees should weigh up before applying for the Pension Loans Scheme,” says John Perri, AMP’s technical strategy manager.
He says the most important consideration is that a reverse mortgage will reduce the value of the family home when it is sold. The longer it takes to repay the loan, the more interest is paid.
“For retirees the Pension Loans Scheme provides an opportunity to free up some equity that they have in their home. This may help bridge the funding gap while looking to secure aged care or while they await an ACAT assessment,” says Perri.
“The downside is that their estate often will be left to pay the outstanding loan, potentially leaving less inheritance to the kids. Retirees should carefully consider their personal situation to work out if this is a viable option for them.”
Few people have taken up the loans scheme. As at June 2016 there were only 669 borrowers with outstanding debt totalling $30 million. The average loan was around $45,000.
Where to get help
The Department of Human Services offers a free and confidential Financial Information Service (FIS) to help people with finances. It is a good idea to meet with a specialist FIS officer to discuss the terms and conditions of the Pension Loans Scheme when deciding whether to apply.
To speak to an FIS officer, phone 132 300 or visit humanservices.gov.au.