How to tap into home equity without losing the roof over your head

17 December 2020:

Topping up super with a lump sum, or regular income, with the help of your home is becoming more popular. But beware of costs and the impact on pensions.

Rising property prices are a reminder that retirees’ homes could be another source of income to top up flagging returns from conservatively invested superannuation.

About eight in 10 older Australians are aware their home can be used to fund their retirement and more than 40 per cent are prepared to access their home equity, according to the ARC Centre of Excellence in Population Ageing Research.
Options range from selling all, or part of, the property through to equity release schemes and a government-backed loan scheme.

The government’s recent Retirement Income Review highlights that “accessing equity in the home can significantly boost retirement incomes without the need for additional contributions”.

“This is a very challenging issue,” says Martin Fahy, chief executive of the Association of Superannuation Funds of Australia, the peak body for the nation’s $2.9 trillion super industry. “The family home provides emotional and financial security,” he adds.

The review also highlights the need for better quality and more accessible advice to guide retirees into retirement strategies that don’t boost income at the expense of other government benefits (such as reduced pension payments), create tax issues or lock retirees into schemes with high fees and opaque conditions.

About 4.5 million retirees have equity in their home that is four to five times larger than their super savings, according to analysis by Household Capital, which offers equity release schemes. On average, male Baby Boomers have about $150,000 in super and women have about $80,000.
Tapping into that equity could help many people aged about 65 achieve a comfortable retirement, which requires $62,083 a year for couples and $43,901 for singles, according to ASFA.

Downsizing

Ultra-low interest rates are clipping retirees’ income but pushing up the value of their homes as buyers flood back into the market and take out new loans at the fastest rate in more than 3 ½ years, according to the Australian Bureau of Statistics.

COVID-19 has also accelerated many retirees' plans to abandon the suburbs for seaside or country addresses with good infrastructure and road links within a two-hour commute of a major city.

The federal government allows those who are 65 or older to make a downsizer contribution into super of $300,000 (or $600,000 for a couple) from the proceeds of selling their home.

The contribution will not count towards contribution caps and can still be made even for those with a total super balance of $1.6 million.

But the extra cash needs to be balanced against the lifestyle impact of relocating, particularly if it involves moving a long way from friends, family and familiar surroundings.

Further, the costs of selling a $3 million property and buying another for $2 million are likely to be about $200,000 after paying stamp duty of about 5 per cent (it varies between states), conveyancing and all related costs of preparing the house for sale and moving, according to analysis.

Australian Housing and Urban Research Institute research shows older homeowners generally prefer to stay in their homes unless they are forced to move because of serious health issues or the death of a partner.

Government loan

Financial advisers give the government Pension Loans Scheme a big tick because it's easy to access and cheaper than other schemes in terms of interest rates and fees. It's open to those aged 66 and older who have the title to their property (those in retirement villages who don't own the title for the underlying land are not eligible).

It's provided as a fortnightly income stream, not a lump sum, and can't exceed 1.5 times the maximum age pension rate. The loan scheme is available to self-funded retirees as well as those on the age pension.

The annual interest rate is 4.5 per cent (expected to be cut on January 1). There are no establishment fees but there may be legal fees.

During 2020 about 3140 loans worth about $52 million were made, which is a trickle compared with the annual national welfare and social security bill of about $192 billion.

“The government wants people to use this scheme because it can't means-test the house [to assess eligibility for benefits] but it wants [to help] fund retirement,” says Brendan Ryan, principal of Later Life Advice, an independent financial adviser.

“It is a great supplement for living expenses,” says Ryan. “It can be turned on even if you just need as little as $10 a month.” He adds the government has streamlined loan applications.

Equity release

This allows a homeowner to tap into up to 45 per cent of the property’s value. Major providers are Household Capital, P&N Bank and Heartland Seniors Finance. Interest rates range from Household Capital’s 7.70 per cent to Heartland’s 5.8 per cent. Set up costs range from a fixed fee to a percentage of assets drawn down.

The loan is repaid in full, including interest and fees, when the house is sold. Voluntary payments can be made earlier.

“Because reverse mortgages effectively tie you back into debt on your home, borrowers should know the pros and cons,” says Graham Cooke, a manager at Finder, which monitors rates and fees.

Household Capital chief executive Josh Funder adds: “Unlike selling the home or downsizing, accessing home equity still maintains a significant reserve of value to fund in-home care and residential aged care and preserves significant savings for retirees to bequeath to the next generation.”

Advantages are remaining owner of the house and continuing to live in it while generating either a supplementary income or lump sum. Reverse mortgages taken out after September 2012 are protected against owing the lender more than the house is worth.

Seek advice on the impact on the age pension or aged care (if one partner is already in a facility). Interest rates, which are much higher than a standard loan, compound and add to the loan balance.

Home reversion

This involves selling a proportion of the future value of a home while the owner continues to live there. The seller receives a lump sum and keeps the remaining proportion of the home equity.

The provider pays a discounted amount for the share of the house sold, which depends upon the age of the seller. For someone in their early 60s it is around 25 per cent. "This is the biggest catch," says Steve Mickenbecker, group executive for Canstar, which monitors fees and services. "If the property market goes gangbusters, then you are giving away a lot of what you could get," he adds.

The seller does not pay interest but should expect charges for valuations and set-up fees.

The cost for the seller is the difference between the value in the share at the time of sale and what it could be worth in the future, taking into account the discount to the provider.

Advantages are being able to remain in the house while getting cash for other needs. Disadvantages include a limited number of suppliers, uncertainty about residual equity in the property and schemes being largely restricted to Sydney and Melbourne.

Other schemes

These include selling "fractions" of a property to an investor in return for a lump sum or regular payment to supplement income. The major providers are DomaCom and BrickX. The seller retains the title and continues to live in the residence until it is sold. Investors can spread risk by holding small amounts in several properties, much like buying into a managed fund.

Original article found at the AFR