Australia to lead the world in provision of home equity as the third pillar of retirement funding

22 November 2020:

Household Capital welcomes today’s release of the Retirement Income Review. Household Capital is Australia’s leading provider of home equity retirement funding. Since launching in 2019, Household Capital has seen a rapid adoption of their services, with over 50 times year on year customer revenue growth.

Dr Joshua Funder, Chief Executive Officer of Household Capital, applauded the Retirement Income Review’s support of house equity access for Baby Boomers. He said, “For most Baby Boomers, voluntary savings outside of superannuation means the equity in their home. Australian homeowners entering retirement today only started to accrue three percent superannuation halfway through their working lives – it’s simply not enough to fund more than 25 years in retirement. Available home equity can double the amount of their superannuation and help fund their retirement. Accessing home equity can offer a responsible, long-term solution to allow current retirees to boost their retirement funding.”

Australia leads the world by including home equity as the third pillar of retirement funding

The findings of Treasury’s Retirement Income Review show that Australia leads the world in establishing home equity as the third pillar of retirement funding. The federal government has established clear principles according to which Australian retirees can voluntarily improve self-funded retirement outcomes by complementing government benefits and superannuation with access to the $1trillion home equity they have already saved.

Household Capital supports the report’s statement that “Housing is an important component of voluntary savings for most people and a major determinant of their retirement outcomes… The home is also an asset that can be drawn on in retirement.”

National awareness needed

“We need to help Australians understand how they can significantly make the best use of their retirement savings, including the equity in their homes” the report said.

The Retirement Income Review clearly identified lack of awareness of home equity retirement funding options available to Australian retirees as a key challenge in ensuring adequacy of our national retirement funding system, stating that there is a need to better help Australians understand how they can significantly maximise their retirement savings, particularly in accessing equity in their homes as many retirees don’t realise the enormous potential to unlock voluntary savings through their home.

“Home ownership is an integral part of Australian wealth creation and it should also be widely available for Australians to voluntarily draw on their wealth to fund their retirement. We have the technology to efficiently deliver home equity retirement funding across Australia. The key is to establish national awareness of the opportunity to make the family home both the best place to live and the right way to fund retirement.” said Funder.

Recent academic research into the home equity funding market by the UNSW Centre for Excellence in Population Aging Research (CEPAR) indicates that over 80 percent of Australians are aware that their home is a significant asset to fund retirement, 43 percent of retirees are open to accessing their home equity to fund retirement and they would draw 13 percent of their home equity to do so.

Importance of home ownership in retirement

The Retirement Income Review clearly set out the multiple roles of the family home in retirement; it provides security, housing and a source of retirement funding, stating, “This report highlights the importance of home ownership in achieving security in retirement such as removing the need for income to pay for rental accommodation and providing an asset that can be drawn on to supplement retirement income.”

‘Australian retirees are worried about their lives. Providing adequate, secure long term funding, including access to home equity, can give our senior citizens confidence in the future” Funder said.

Major opportunity to improve retirement outcomes

The Retirement Income Review report identified the major yet-to-be realised potential role for home equity to complement the pension and superannuation in providing retirement funding stating: “Home owners also have the opportunity to access the equity in their home to supplement retirement income and manage longevity risk, although few currently do so. If this potential were realised, housing would take on an even more important role in the retirement income system.”

“This is a massive opportunity to improve retirement outcomes,” said Funder. “Australian retirees enjoy extended longevity – a couple at 65 years old need to plan for 30 plus years in retirement. Around 75 percent of Australian retirees have a strong intention to remain at home throughout retirement and do not want to downsize. There is growing pressure on both the government and individuals to fund in-home care as well as aged care. Collectively, Australian retirees own over $1trillion in home equity; at retirement, median retirees have saved around $200k in superannuation and over $700k in home equity.”
Australians have been able to access home equity for a number of years through traditional bank reverse mortgages and home reversion schemes. Until now there has been little focus on using home equity to improve long term retirement funding.

The third pillar of retirement income

The three pillars of Australian retirement funding system are the age pension, superannuation and voluntary savings including home ownership. Even though the majority of retired Australians hold the greatest amount of wealth in their properties, home ownership is often ignored as a valuable source of income.

The Royal Commission into Aged Care Quality and Safety has highlighted both the cost and complexity of providing adequate residential aged care to an ageing population. In-home care is preferred by most older Australians and costs around one third as much as institutional aged care.  Accessing home equity is clearly one major way in which many Australian homeowners can self-fund retirement and aged care.

Over the past decade, Australia has come to lead the world in regulatory oversight of home equity retirement funding.  Accessing home equity allows retirees to safely draw on wealth saved in property, making their homes both the best place to live and a great way to fund their retirement.

Benefits of including home equity in retirement funding

Harnessing the value of the family home for both retirement housing and funding improves retirement outcomes, lifestyles, and wellbeing. This solution provides a sustainable and adequate retirement funding plan for the majority of Australian retirees, not just those with $1 million in superannuation.

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 be the bank of mum and dad and to bequeath to the next generation.

Home equity retirement funding enables Australian retirees to draw on all three pillars of retirement funding flexibly throughout retirement to meet their own retirement funding needs and improves the probability that they will successfully fully fund their longevity. It supports age-appropriate housing for in-home ageing at all stages of retirement for couples and surviving partners.

Economically the model has large scale advantages, bringing $1 trillion of retirees’ savings to bear on funding their own retirement without including the home in the assets test for the pension or imposing a death tax to recoup the costs of aged care services. Accessing the third pillar also boosts retiree consumption and provides long-term stimulus to the domestic economy.