Retirement:

Susan Hely

It is not surprising that retirees want to unlock the value tied up in their homes. With soaring house prices in capital cities reaching an average of $942,400, and $556,400 for units, the home is often their biggest asset, outstripping superannuation. “Housing wealth is now recognised as being the fourth pillar of retirement income,” says Dianne Shepherd, general manager of Homesafe Wealth Release. The other three are the age pension, compulsory super and voluntary savings.

There are several ways to unlock some of the money tied up in your home. You can sell it and buy a smaller property with less maintenance; move to a cheaper area in the country or along the coast; or sell it, invest the money and rent, giving you more cash to live on.

The federal government now provides an incentive to sell the family home, allowing up to $300,000 to be contributed to super. A couple could boost their super by $600,000 and not have it counted towards the $1.6 million cap that applied from July 1.

But if you don’t want to sell, there are strategies that allow you to keep your house and bring in extra money: •

You could take in a boarder or rent out a room through Airbnb, although this can affect age pension payments. •

You could sell to one or more of your children if they are cashed up and rent it back from them. It is best to draw up a watertight legal agreement outlining all the conditions, including your right to stay in the property. •

You could borrow against the value of your home and take out a reverse mortgage. This allows you to stay there and gives you some cash. •

You could sell part of your property through what is known as an equity release product. •

The Department of Human Services has a pension loans scheme that allows people to use the capital they have tied up in real estate as a non-taxable loan. It can be for either a short time or an indefinite period, and is paid in fortnightly non-taxable instalments.

For retirees, taking out a loan against the home can be transformational, says Andrew Ford, CEO of Heartland Seniors Finance, a reverse mortgage specialist. It can pay off debts or finance home improvements, a new car, travel, family law resolution, or help family members and buy aged care support. “Retirement lifestyle is not so great for many people and they cut back on essentials when they don’t really need to.”

But which is the best option?

1 DOWNSIZING

With growing property prices in capital cities, people are weighing up whether to cash in and move out. The decision should be based on what is important in terms of lifestyle, says Jason Petersen, who heads the independent financial planning business 5 Financial. He has clients who don’t have enough in their super but their home is quite valuable. Often maintenance costs are becoming a drain on their limited retirement income too.

Retirement is not so great for many people, and they cut back on essentials when they don’t really need to”

But he says people typically don’t consider the costs of moving, such as stamp duty and agent fees. For a property worth around $1 million, you can expect transfer costs of around $50,000. That can buy a lot of maintenance and allow you to modify your home, says Petersen.

Once you have unlocked some of your property’s value, this could affect your eligibility for the age pension as the extra money will be counted in the assets and income tests. If you stay in your home, you could qualify for a bigger age pension. You can still sell and move further down the track.

People often don’t make the sort of money they expect from downsizing, warns Steve Greatrex, a financial planner and principal of Wealth on Track. He says that a smaller place might not be a lot cheaper, particularly if it is in the same area.

Also moving away to a cheaper place can be lonely if you leave behind your social network, he says. Not surprisingly, people can have a significant emotional attachment to their home. Often the prospect of de-cluttering, packing and moving is overwhelming.

“As seen in the findings of the Productivity Commission’s report last year, most older Australians do not downsize to a smaller home in retirement because they prefer to age in their current home or because there is a lack of suitable and affordable options within their desired community,” says Shepherd.

But if you want to relocate, it is always a good idea to let out your home and rent in your potential new location to see if you like it.

Jill Weeks, retirement speaker and author, says that with rising property prices people who sell up are unlikely to move back to where they once lived. They are known as “half backs” as they can only afford to move halfway back.

Weeks recommends researching the new area thoroughly by subscribing to the local newspaper for 18 months before you move to understand the demographics and see if you can see yourself fitting into the new community.

Also check the medical services and whether you have to travel a long way to see specialists. Does it have a good communications reception such as the national broadband network? If it is a holiday destination, are prices in the shops often higher in the tourist season?

2 RENT OUT A ROOM

If you are in an area close to a university, language school or hospital, you may be able to rent out a room to a student or worker. Or if you are in an area that tourists like to visit, why not take in paying guests? Some 2.1 million people used Airbnb in Australia in the 2015-16 financial year, according to Deloitte. You don’t have to be in a major capital city either. Airbnb says 56% of all guest arrivals in 2017 across Australia were to listings outside the major cities.

3 REVERSE MORTGAGE

Reverse mortgages are for older Australians. In fact, the older you are the more you can borrow against your home. For example, with Heartland, the winner of Money magazine’s 2017 Best Reverse Mortgage category, a reverse mortgage is available to people aged over 60. You can borrow 25% of the value of your property if you are 70 and 35% if you are 80. Ford says 48% of its customers are couples.

It makes sense to use a reverse mortgage when your other assets, such as superannuation, are exhausted. You use the equity in your home as security for a loan, paying interest as you would with any other borrowings. But you don’t have to make repayments while you live in your home: the interest compounds over time and is added to your loan balance.

Each year the reverse mortgage lender charges fees and interest and adds them to the loan balance. You end up being charged interest on your interest, which builds up over time. There is no way to know for certain how much you will owe at the end of the loan. The cost depends on how much you borrow, how long you have the loan and whether you receive the money as a lump sum, a regular income stream or a line of credit.

Interest and fees are charged on the loan and the interest rates are usually higher than average home loan rates. If you take out a loan with a variable rate, you are subject to fluctuations. Often there is a settlement fee plus independent legal fees.

Costs increase when you borrow additional money. Under the National Credit Code, reverse mortgages must have a “no negative equity guarantee”, which means you can’t owe more than the value of your property. This means you won’t leave your beneficiaries any debt to pay.

The reverse mortgage market has been growing steadily, with 31,000 loans worth a total of $3.23 billion at the end of March 2017. The average loan size is $100,000 with the major banks and $127,000 with other institutions.

“It used to be the children who would talk their parents out of a reverse mortgage but now more and more children are contacting us to set up a reverse mortgage for their parents,” says Ford.

The amount a couple can borrow depends on the younger person’s age.

Some retirees who are not ready to sell the family home use a reverse mortgage as bridging finance

There are plenty of benefits with a reverse mortgage. You can stay in your own home and continue to own it. You don’t have to make any repayments on the loan until you sell your house or die. You can set it up so that you can stay in your home until you are ready to move out.

Some retirees who are not ready to sell the family home use a reverse mortgage as bridging finance, then move into aged care and eventually sell. It can delay the emotional issues of moving into aged care at short notice so that people can be more selective about where they go.

You can pay off your loan, and Ford says a surprising 65% of borrowers with Heartland do so, in part or in full. “They come into money and voluntarily pay down the loan.”

What are the disadvantages? Be prepared to see your debt mount up as the interest grows. It will compound and can rise quickly.

The Australian Securities & Investments Commission (ASIC) also warns that if you are the sole owner of your home and you move or die, anyone who lives with you may not be able to stay in the home with you.

Watch out if you intend to move to aged care accommodation or leave an inheritance. There might not be enough money to do either.

Borrowers need to consider all the options and seek independent legal advice to make informed decisions.

4 SELL PART OF YOUR HOME

If you don’t want to run up a lot of debt, you can sell a share of your home. For example, if you sell 30%, you will keep control of 70%.

Through this scheme, called Homesafe Wealth Release, you can put a cap on the share of your home sold to the company. “In doing so customers can quarantine a part of their home’s value for the future – either for aged care purposes or to leave for beneficiaries,” says Shepherd. “This advantage is attractive to homeowners who need to access their equity today but are committed to leaving something for their beneficiaries.”

Homesafe is the brainchild of actuary Peter Szabo. In 2005 he came up with the concept of a debt-free equity release for seniors to access the value in their home. He didn’t like the way the debt builds up with a reverse mortgage. Instead he wanted to protect the rights of the homeowner and avoid the risks that come with rising interest rates and living beyond the average life expectancy. He set up Homesafe in association with Bendigo and Adelaide Bank. It allows retirees aged over 60 and living in Sydney or Melbourne to receive cash by selling part of the future proceeds of their home.

“An increasing number of ageing homeowners with mortgage stress are looking for equity release solutions to reduce the anxiety caused when considering how long they may need to remain in the workforce to continue to service debt,” says Shepherd.

This is how it works:

Frank and Gwen are 65 and 61 and have lived in their home for over 35 years. Frank is a truck driver and is retiring at the end of the year; Gwen is a retired nurse. They have three children: two live overseas and one lives 20 minutes away.

Several years ago Frank and Gwen took out a loan to do some renovations, and now the mortgage has grown to $50,000. They are struggling to meet the $500 monthly loan repayments as well as increasing council rates and utility bills. Next year their daughter is turning 40 and they would love to buy her something special, and Gwen’s car needs new tyres.

They don’t want to downsize as they love their home and look forward to their grandchildren coming to stay. Frank is worried he won’t be able to retire if they can’t sort out their financial needs.

So they turned to Homesafe and received a lump sum of $80,000 in exchange for selling an agreed share of the future sale proceeds of their home, with the comfort of knowing they can choose when to sell it all.

5 PENSION LOANS SCHEME

With a low interest rate of 5.25%, it is worth considering the pension loan scheme from the Department of Human Services. It is around 1% cheaper than interest rates on reverse mortgages.

The scheme was introduced at the same time as the pensions assets test in 1985, primarily to assist assetrich, cash-poor part age pensioners, says Hank Jongen, a spokesman for the Department of Human Services.

A person who is of pension age, or the partner of someone who is, may be able to obtain a loan that will increase their fortnightly pension payment from a part-rate or nothing at all, due to either the income or assets test, up to the maximum rate.

The scheme is available to people who own real estate that can be used as security. It depends on their age too.

The loan is made as a fortnightly top-up to the pension, to no more than the maximum fortnightly rate, currently $888.30 for a single. You can apply if you receive a part age pension or some other pension.

Interest accrues until the loan is repaid. The longer it takes to repay the outstanding balance, the more there will be to repay over the life of the loan. Repayments can be made at any time or the debt, including the accrued interest, can be left to be recovered from the estate.

At June 2016 there were 669 borrowers in the scheme with outstanding debt totalling $30 million. The average loan is around $45,000.

Jongen says interest in the scheme has remained steady over recent years. “They can get a top-up payment only if they receive less than the maximum rate of age pension, carer payment, disability support pension, bereavement allowance, widow B pension or wife pension. It doesn’t apply if they receive the maximum rate,” he says.

The borrower has to manage the costs associated with the loan, such as legal fees.

The department has a free and confidential financial information service (FIS). “We recommend meeting with one of our specialist officers to discuss the terms and conditions of the scheme,” says Jongen. To speak to an FIS officer, phone 132 300.