Equity Release: Using Your Home to Fund Your Retirement
A high proportion of retired homeowners plan on leaving the family home to their children. Although you may have some super and other savings, and receive a full or part pension, However, while the Super Guarantee increased to 10 percent from 1 July 2021 your home's equity is expected to play an increasing role in funding your retirement.
The government’s Retirement Income Review highlights that accessing the equity in the family home is expected to play an increasingly important role when it comes to funding retirement, and that accessing the equity in your home can significantly boost retirement income.
Finance guru Noel Whittaker has previously commented that the report was unusual in that it “made no recommendations, it just provided information". This begs the question – how exactly is the current system going to adapt to ensure its stated purpose of delivering ‘adequate standards of living in retirement in an equitable, sustainable and cohesive way.’
The 600-plus-page final review document makes several statements about how near-retirees should prepare their savings for post-work life to supplement the three pillars of retirement funding, namely:-
- The Age Pension
- Private Savings (including home equity)
For most homeowners aged 65 and over, the family home is their main asset and, therefore, the primary source of voluntary savings. Prompting you to support your retirement by leveraging your most significant financial asset, the report highlights the benefits of homeownership as 1) lower housing costs (not needing to pay rent) and 2) as an asset from which to draw retirement funding.
Many retirees prefer to avoid accessing home equity because they fear this might impact their entitlement to the Age Pension and because they wish to leave the family home as a bequest for their children.
Understanding Your Equity Release Options
Retirement income experts also point out that the complexity surrounding access to your home's equity may be a barrier to its acceptance as a funding source in retirement. Few Australians understand how home reversion schemes and reverse mortgages work as a source of retirement funding. Yet with more of our senior citizens living well into their 80s and 90s, the number of Australians retiring without enough money to fund a comfortable retirement is expected to increase.
RMIT University Associate Professor Stuart Thomas notes that "Despite Australia's high rate of homeownership, for many superannuation and the Age Pension will not be enough to support them comfortably, especially in late retirement."
“If the government is genuine about making equity release a more prominent method of retirement funding, and addressing this gap, it needs to address low financial literacy in this area.” While Australians can identify home equity as a viable means to pay off existing debt or fund home improvements, Thomas explained that the general populace has a poor understanding of how equity release provides a source of retirement income.
Overcoming Fear & Uncertainty
Founder and CEO of Household Capital, Josh Funder, has suggested that it's more a problem of understanding than market availability.
"Retirees are reluctant to invest in equity release products based on failings in the equity release market in decades past, and older Australians were right to lack confidence in the bank-dominated reverse mortgage market of the past".
"It was complex, poorly regulated, it was not transparent, and so it was hard for people to understand," Funder explains. Under the old system, Australians who used reverse mortgages were seen as "last-resort borrowers" by the companies, mainly banks, which provided loans focused on short term consumption, leaving borrowers with long-term retirement funding.
Age Pension Asset Testing Requires Reform
Even with a better understanding of the pros and cons of equity release products, many senior Australians remain resistant to using their property to fund their retirement. They are likely to remain resistant until the Government reforms the pension's asset testing rules.
While a million-dollar home is exempt from asset testing, cash and additional assets are not. This means that while someone with a $1M home can qualify for the full pension, another person having downsized and now holding cash is "penalised” even though the two parties' total asset positions might be identical.
Meanwhile, media commentators point out the inequities of a system that forces workers to forego wage increases to fund mandatory super contributions by employers - saving for a retirement that could be at least part-funded by home equity.
Adam Creighton, The Australian's economic editor, referred recently to a report by the Grattan Institute that found that retirees over the age of 75 had on average just under $1 million in equity in their homes, plus other financial assets – a sum that dwarfed the $127,000 they had on average in super.
The review referenced an example of a retiree releasing $5,000 a year in equity from a $500,000 house, leaving them with about three-quarters of the value of their home at age 92. In support of people wanting a higher standard of living than the Age Pension provides Creighton posed the question: "Why shouldn't 'eating your house', or at least having a nibble using a reverse mortgage, be a reasonable option for retirees?"
One of the three experts who made up the Retirement Income Review panel - Dr Deborah Ralston, sees the good sense of drawing down a responsible amount of home equity to supplement retirement income.
“With products that are emerging now in equity release, it's quite possible to stay living in your home for longer and to use a small part of your (home) equity to supplement your income."
One way to work out for yourself whether a home equity release might help you boost your retirement nest egg is to try our Household Capital’s online calculator.
* The Comparison Rate is 5.73% and is based on a loan of $150,000 for 25 years. WARNING: this comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.
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