Retirees feeling the pinch of higher living costs, are reluctantly making difficult decisions as they draw dangerously close to outliving their retirement savings.
A 2021 report released by the Association of Superannuation Funds of Australia (ASFA) found that 90% of Australians who died aged over 80 years had no superannuation savings – an alarming statistic given that our average life expectancy is currently 83.6.
For many retirees, the family home remains their only asset. Not generally subject to capital gains tax, or assessable under the assets test, it represents financial security, independence and family history which is why downsizing is an unpopular option.
However, the family home also represents a reservoir of untapped equity.
Consequently, retirees are reviewing ways to access that equity through reverse mortgages or equity release schemes.
These arrangements provide access to some of your home’s equity, usually to cover medical costs, home renovations or even living expenses.
Now, here’s the fine print.
Reverse mortgage: borrowing money using the equity in your home as security over the loan.
| Pros | Cons |
| You continue living in your home. | The amount you can borrow is limited and usually based on your age. E.g., if you’re 65, you will be limited to about 20–25% of your available equity. |
| Can be taken as a lump sum, line of credit, income stream or a combination. |
Fees, charges and interest apply based on how much you borrow. |
| You may not have to make repayments on the interest while living in the home. |
It’s not necessary to make interest repayments while living in your home, but the debt will increase as the interest compounds. After selling your home you must repay the entire amount (including fees). If you die, your estate must repay the full amount. |
| Since 2012, reverse mortgages have negative equity protection. This ensures your loan cannot grow to be greater than your home’s market value. Ensure any contracts you sign include negative equity protection. |
Over time, your debt will grow and may become more than your home equity. |
Equity release: selling part of your home through property investment funds.
| Pros | Cons |
| You continue living in your home. | Fees are calculated on the part of your home you sell, based on the value of your home’s equity. If your home grows in value, the fees increase accordingly. The fees are deducted from the remaining equity in your home. |
| Can be taken as a lump sum or installments. |
Your home equity will reduce over time because of the fees. If it reduces to zero, you may not be able to continue living in your home. |
| When you sell your home or die, the investment fund must receive its share of the accrued equity. |
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| Application fees and service fees apply. Additional fees may apply if you end the contract early. |
Depending on your circumstances, either of these schemes may work for you. However, before making any decisions, consider these alternatives:
- Government no interest loans provide lump sums with no fees or charges. Visit the Good Shepherd Australia website for details.
- The Home Equity Access Scheme offers government backed assistance. See Services Australia or the Department of Veterans’ Affairs for information.
- Reconsider downsizing. The government offers incentives that may change your mind.
Regardless, get your financial adviser to run the sums for you. They’ll make sure your super savings are on track and you’re maximising your pension entitlements. You’ve planned a busy retirement, so don’t let financial worries slow you down.
Sources:
- www.superannuation.asn.au “Superannuation balances prior to death: Superannuation balances of older Australians”, ASFA, March 2021 (accessed 2 April 2023)
- www.moneysmart.gov.au “Reverse mortgage and home equity release” (accessed 2 April 2023)
- www.goodshep.org.au “No Interest Loans (NILs)” (accessed 2 April 2023)
- www.servicesaustralia.gov.au “Home Equity Access Scheme” (Last updated 2 February 2023)
