Transform your retirement with a Household Loan

This story first appeared on Citro where you’ll find more smart reads on money, health, travel and lifestyle.

A Household Loan lets you access the wealth in your home without selling up, so you can enjoy more freedom, more choice and a more comfortable retirement.

By Bron Maxabella

It’s one of life’s great ironies: just when you’ve paid off the mortgage and are ready to enjoy life, you realise your super’s “super-lite” and the Age Pension barely covers the basics. Meanwhile, you’re sitting on a whole lot of value and it’s quite literally under your feet.

That’s where a Household Capital Household Loan comes in. It’s a type of reverse mortgage designed for homeowners aged 60 and over who want to tap into the wealth stored in their homes, without selling up or downsizing. Think of it as unlocking a financial back-up plan, only it’s one you can use right now to fund a better lifestyle.

At its core, a Household Loan is a way to access the wealth held in your property. So if you’re over 60 (the youngest person on your home’s title must be aged 60+) you can use your home equity to create a flexible loan facility in retirement.

It’s secured by a loan on your home, but unlike a traditional mortgage you don’t have to make regular repayments (although you can if you choose to). Instead, the interest compounds until the loan is eventually repaid when you move out permanently – either by the sales proceeds or by your estate if you pass away.

You keep full ownership of your home, stay in it for as long as you like and benefit from any capital gains along the way. That’s a big tick for stability in retirement.

Many Australians reach retirement with a comfortable home, but not-so-comfortable finances. That’s probably because buying property takes up such a massive part of our salary in the first place…

Even if you have managed to save a reasonable amount of super, you might want more flexibility to enjoy life on your terms. A Household Loan can be used for almost anything that improves your financial wellbeing in retirement:

• Top up your regular super or Age Pension income
• Pay off an existing mortgage, personal loan, car loan or credit card
• Fund a dream travel plan
• Make overdue home improvements – new kitchen, anyone?
• Put some money aside as a ‘just in case’ contingency fund
• Buy a reliable new car (or a zippy little one just for fun)
• Help out the kids or grandkids with a home deposit or uni costs

More here: 14 truly useful ways to use your home equity

It’s your money and your decision; the loan simply gives you the means to say “yes” a little more often. (Which can make a huge difference – read Vivienne’s story here.)

Like many things in life, it depends. The borrowing amount is based on what’s called a Loan to Value Ratio (LVR), which is a percentage of your home’s value. That percentage goes up the older you are – starting at around 15% of your property value at age 60, increasing by about 1% per year.

This means the older you are, the more of your equity you can access, while still leaving enough in your home for future needs or inheritance. You can also take out the loan in stages, drawing down only what you need, when you need it… this could be a wise move if you draw an Age Pension…

Check your borrowing power here.

In most cases, a Household Loan does not affect your Age Pension. That’s because the funds you draw from your home equity are not counted as income or assets unless and until you keep the money in a financial product (like a bank account or investment).

• If you elect to take your loan using a regular drawdown facility, the loan itself is not assessed by Centrelink because it’s a debt secured against your home (which is exempt from the assets test if you live in it).
• If you take out funds and immediately spend them on exempt purposes – like home renovations, medical care, paying off debts or mortgages or using it for day-to-day living expenses – those funds don’t affect your pension.
• If you establish a reverse mortgage with a line of credit but don’t draw on it immediately, those undrawn funds won’t yet be assessed by Centrelink.

• Retaining funds as savings or investments: If you withdraw a lump sum and leave it sitting in your bank account or use it to buy a financial asset (like shares), that amount can count under the income and assets tests.

A quick example to show how it works:

Let’s say you take out a lump sum of $50,000 from a Household Loan and pop it in your bank account.

• For the first 90 days, Centrelink considers the first $40,000 exempt, so only $10,000 counts as an asset straight away.
• After 3 months, if you haven’t spent any of the money, the full $50,000 will count when Centrelink looks at your assets.
• And while the money’s sitting in your account, Centrelink assumes it’s earning interest, even if it’s not – this is called deeming, and it might affect your Age Pension a little (you can find out more about deeming here).

Now let’s say you took a lump sum of $20,000 instead.

• That whole amount would be ignored for 90 days.
• But if you haven’t spent it after that (say on your holiday, home reno project or whatever else you’ve taken the loan to do), it starts to count as an asset too.

So the trick is: if you’re going to take a lump sum, know how you plan to use it and try to do that within the 90-day window. If you don’t have any particular plan, you may be better structuring your Household Loan as a line of credit with a regular drawdown facility.

• Buying assessable assets: If you spend the Household Loan on things that are counted by Centrelink, it could affect your pension. For instance, purchasing a new car, boat, or expensive caravan with the lump sum will convert the money into a tangible asset that Centrelink assesses.
• Gifting money to family: if you want to use some of your Household Loan to give the kids or grandkids a leg up via a house deposit, a bit of uni help, or just a cash buffer to make life easier for them, be aware that Centrelink’s gifting rules still apply. You’re allowed to give up to $10,000 a year, and no more than $30,000 over five years, without it affecting your Age Pension. Go over that, and Centrelink treats the extra cash as if you still have it, even though you’ve handed it over to the kids.

So yes, while you can absolutely use a Household Loan to invest in shares, buy a new car or help the family, just make sure you understand how it could affect your Age Pension first. A quick call to Centrelink’s Financial Information Service can help you make a plan that works for everyone.

This is where things are particularly reassuring. Household Loans are regulated under the National Consumer Credit Protection Act, which provides important consumer protections. These include:

• You retain full home ownership
• Guaranteed occupancy for life: no one can force you to sell or move out
• No negative equity guarantee: you (or your estate) will never owe more than your home is worth

In other words, you’re not risking the roof over your head, even if house prices go down.

That said, there are a couple of things to keep in mind:

1. Your loan balance grows over time: If you choose not to make repayments along the way, interest compounds over time, reducing your home equity.
2. Accessing home equity now means less later: Releasing equity now means there may be less available for future needs like aged care or inheritance.

But, remember, the big protections are built in: you’ll always own your home (and keep any capital gains if it goes up in value), can stay in it as long as you like and can never owe more than it’s worth.

If you’re asset-rich but cash-strapped, and you’d prefer to live your best life in the home you love – rather than downsize, relocate or go without – then a Household Loan could be the financial tool you didn’t know you needed.

It gives you the power to make choices, instead of sacrifices. It turns your home into a springboard, not a money trap. And best of all, it lets you live the retirement you imagined when you first bought the place all those years ago…

Get started by plugging your numbers into the Household Capital’s Wealth Calculator.

Information in this article is general in nature and is not intended to influence decisions about any products or services. This article does not take into account your personal circumstances, objectives or financial situation. Before acting on information in this article, please consult your professional or financial adviser to determine whether it is appropriate for your circumstances.

Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable, and terms and conditions apply (available upon request). Household Capital Pty Limited ACN 618 068 214, Australian Credit Licence 545906, is the Servicer for the credit provider Household Capital Services Pty Limited ACN 625 860 764.

Citro may receive a referral fee for any products obtained from Household Capital.