An alternative to drawing on your super in a downturn
If you’re worried about your super in these turbulent times, it might be time to take another look at the third pillar of retirement funding – home equity.
It’s an unprecedented scenario. A health crisis precipitating an economic crisis, one that’s having repercussions around the globe. One that’s impacting people across society, both those in work and the retired.
While a pandemic is new to most of us, economic crises are not. It’s been just 12 years since the global financial crisis (GFC) and it may well have impacted the retirement savings of many YourLifeChoices readers.
One lesson from the GFC was clear: drawing from a diminishing pool of capital – in other words, drawing from a super fund when markets are down – is not good for the longevity of your capital. So, with interest rates at historical lows, companies cutting dividends and super in a world of pain, what’s the alternative?
The third pillar of retirement funding
Home equity is considered to be the ‘third pillar’ of retirement funding. Home equity can be used to provide a regular income stream or a lump sum payment.
Home equity is the market value of your home, minus any outstanding debts you may have registered against it. In other words, it’s the net value of your home.
You can access some of your home equity via an equity release product; this includes Household Capital’s Household Loan. As with a standard home loan, it is secured by registering a first mortgage over your property.
Five facts you need to know
Here are the five facts that detail what you need to know to determine whether a Household Capital Household Loan can help you have greater confidence in your retirement.
What is a Household Loan?
The Household Loan is a type of reverse mortgage that’s been designed to work within Australia’s retirement system. It can help you access the wealth accumulated in your home to enhance your lifestyle and wellbeing in retirement, without needing to sell or downsize.
The Household Loan allows retired Australians to access their home equity. This is achieved via a loan facility that doesn’t require repayment until you vacate the property and comes with several protections, including guaranteed occupancy for as long as you want to live in your home.
What’s the interest rate?
Household Capital’s current interest rate is 5.15 per cent per annum (comparison rate 5.21%)*. This is the lowest available reverse mortgage rate in Australia.
* The Comparison Rate 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.
This is a variable rate; the main benefit of this is that you have flexible repayment options. Interest is calculated daily and added to the loan balance each month.
Interest is charged on the funds you receive. If you’re receiving a regular income stream, interest is only charged on the amounts drawn.
A Household Loan does not require regular repayment; instead it defers principal and interest repayment to when the loan matures. With a Household Loan, you can elect to make monthly interest payments to avoid compound interest.
A Household Loan may be repaid, in part or full, at any time without penalty.
What is compound interest?
Compound interest means that you pay interest not only on your borrowing, but also on the interest (and any fees) charged…or, simply, you pay interest on the interest for the duration of your loan.
Over time, the amount you owe will increase, because you don’t have to make regular repayments.
The following case study illustrates the impact of compounding interest on a total loan. However, as shown, growth in the value of the home can help to offset the effect of compounding interest over time.
Can I lose my home by owing more than the house is worth?
The “no negative equity guarantee” (NNEG) clause, introduced in 2012, means you are protected by law and cannot owe more than your home is worth, irrespective of the value of the property.
It’s also important to note, there is no default risk. You cannot be removed from your home by the lender, nor be forced to sell your home at any time against your will, as long as you have met your obligations under the loan, as specified in the terms and conditions of the loan contract. This relates to maintaining the condition of your home, and paying rates and insurance.
How do I repay a Household Loan?
A Household Loan will be repaid when you choose to downsize or move permanently into a retirement village or residential aged care. It may also occur when the last surviving homeowner passes away.
The loan is generally repaid from the proceeds of the future sale of your home. Repayment may also come from funds provided by family members if they do not wish to sell the family home.
You can make repayments at any time without penalty, which will reduce the amount of interest you pay.
Some borrowers choose to pay the interest each month so only the loan principal needs to be repaid at the end of the loan. No further fees apply if you choose to pay the loan out early.
This article is published on yourlifechoices.com.au
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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