How to Access Your Home Equity
Are your retirement savings and investments enough to fund thirty or more years of retirement? Do you have enough to cover any unforeseen medical, transport or home maintenance costs? Will you need to forego the little luxuries that you worked so hard to enjoy in retirement?
If you are concerned that your retirement fund may not go the distance, you’re not alone. As increasing numbers of seniors live well into their 80s, potentially 90s – more Australians are retiring without enough money to fund a comfortable retirement or maintain their lifestyles.
The Retirement Income System was designed almost thirty years ago to help fund 15 years of retirement. Since then, the length of retirement has practically doubled, and an increasing number of seniors require additional income. This article describes a range of options to help you access additional funds for your retirement.
- Retirement Income Systems Review
- Age Pension
- Savings & Home Ownership
- Accessing Equity in Your Home
Whether you are looking for options to supplement your savings or the pension, or want to leverage more of the wealth accrued over your lifetime, we can help you improve your retirement funding by accessing your primary source of accumulated wealth, the equity in your home.
Retirement Income Review (2019 - 2020)
In 2019, with public consultation, a review of the Retirement Income System was undertaken by an independent panel; its mission was to investigate how the current system is expected to perform into the future, given the fact that Australians are living longer, healthier lives.
The review considered:
- incentives for people to self-fund retirement
- fiscal sustainability of the system
- the role of the three pillars of the retirement income system
- the level of support provided to different cohorts across time.
While the Final Report - Retirement Income Review released November 2020 provides evidence to indicate that the Australian retirement income system is effective, it also highlights opportunities to improve the system.
The report offers the guiding objective for the development of a system ‘to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way’ and suggested definitions.
- Ensure a minimum standard of living for retirees with limited financial means consistent with prevailing community standards.
- Facilitate people to maintain a reasonable standard of living in retirement.
- Target Government support to those in need.
- Provide similar outcomes for people in similar circumstances.
- Cost-effective for taxpayers in achieving adequate retirement outcomes.
- Sustainable and robust to demographic, economic and social change.
- Effective incentives to smooth consumption.
- Support people in taking personal responsibility for their retirement incomes.
- Interact effectively with other systems.
Not unnecessarily complex for consumers.
The Age Pension is the central pillar of Australia's retirement income system and plays a vital role in supplementing superannuation savings so that retirees can maintain their living standards.
Given the low interest rates on savings in term deposits, the pension also provides a buffer for retirees whose income and savings have fallen due to market conditions or those who outlive their savings.
Although the report found that the pension is adequate when combined with other financial support, it also highlights that many senior Australians will require additional assistance when renting.
Compulsory superannuation allows you to achieve a retirement income more closely aligned to your pre-retirement income. Currently, superannuation makes up a small share of most retirees’ net wealth because compulsory contributions were not introduced until toward the end of most retiree’s working lives . As the system matures, superannuation is expected to provide a greater proportion of retirement funding.
If you are like many older Aussies, your superannuation plus private savings may fall short of the retirement lifestyle you plan to lead or maintain. However, if you own your own home, you have several options to increase your retirement income.
Private Savings & Home Ownership
Fixed interest rate term deposits were traditionally a reliable source of retirement income. However, with historically low-interest rates, they currently generate very little income from private savings.
For most homeowners aged 65 and over, the family home is their main asset and an essential factor influencing outcomes and how people feel about retirement. The current system favours homeowners, with your principal residence being exempt from pension assets testing. Homeowners also benefit from lower housing costs and a store of wealth to draw from in retirement.
Despite a combined value of more than $1 trillion available to baby boomers in the form of home equity, only a fraction of people draw on this home equity to support retirement. The vast bulk of this wealth remains locked in property assets.
Chief Executive of Household Capital, Josh Funder, notes that tapping into home equity can play a crucial role in increasing retirement funding. And the federal review supports this, noting that accessing the equity in your home can significantly boost retirement income without the need for additional contributions.
Option for Accessing the Equity in Your Home
Pension Loans Scheme
Most Australian retirees are to varying degrees eligible for the Age Pension. Under the current rules involving asset testing, the amount you are eligible for reduces as income and or assets increase and, at a certain point, cuts off.
However, under the Pension Loans Scheme (PLS), you may be eligible to borrow from the government up to 1.5 times the maximum rate of pension and have this paid fortnightly alongside any Age Pension you’re due. The loan balance compounds fortnightly at 4.5% per annum.
Although this goes some way to supporting access to home equity, Funder indicates that the scheme does not meet the broad range of retirement funding needs of most retirees because the level of income is limited and lump sum payments are currently unavailable.
Home Reversion Schemes
Home Reversion schemes provide a lump sum in exchange for selling a percentage of your home while you retain the right to stay in your home for life. The Australian Securities and Investments Commission (ASIC) warns that home reversion schemes can be complex. And as the property isn't 'sold' on the open market, you may not receive the benefit of full market value.
The DomaCom Equity Release scheme involves paying rent on the proportion of your home you sell to the lender, with the option to sell additional equity every five years to cover this rent component. Bendigo Bank’s Homesafe product is a home reversion scheme only available to eligible property owners in Melbourne and Sydney.
Reverse mortgages are the most popular form of equity release in Australia and have been designed to meet the needs o f retirees. A reverse mortgage enables you to draw on your home equity and to own and live in your family home for as long as you wish.
Household Capital’s Household Loan is a reverse mortgage that enables you to draw on the savings accumulated in your home to meet your long term retirement needs. With the option to draw the loan as a lump sum or as regular income (or both!), a Household Loan enables you to responsibly access a portion of your home's value while you continue to enjoy the benefits of living at home and remaining in your community.
A reverse mortgage is a loan secured against your property, yet does not require regular repayments. Instead, the interest payable is added to the loan at 5.20% per annum*.
Our industry-leading low-interest rates ensure that your loan grows slowly, allowing you to retain more of your home than when borrowing at higher interest rates. Funder sayd retirees looking to build their retirement nest egg should feel confident about the future.
If you're a retiree with a large proportion of your life savings tied up in property and want to increase your retirement savings, a Household Loan from Household Capital can boost the prospects of a long and fulfilling retirement. Check out our online equity calculator to see how much home equity you could access to improve your retirement.
* The Comparison Rate is 5.23% 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.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.
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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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