Equity release can top up your cash

Senior equity access schemes, also known as reverse mortgages, can solve a lot of problems for asset-rich, cash-poor retirees, says Ray Taylor, from Reverse Mortgage Finance Solutions (RMFS).

Home equity release lets you access some of your equity while you continue to live in your home, says Moneysmart (moneysmart.gov.au). There are many reasons you may require extra cash, including home modifications, medical expenses or living costs.

Ways to access equity in your home include: reverse mortgage; home sale proceeds sharing (home reversion); equity release agreement; the federal government’s Home Equity Access Scheme.

The amount of money you can get depends on: your age, the value of your home; and the type of equity release.

“Your decision could affect your partner, family and anyone you live with,” says Moneysmart. “So take time to talk it through, get independent advice and make sure you understand what you’re signing up for.”

With a reverse mortgage you can take the amount you borrow as a regular income stream, a line of credit, a lump sum or a combination of these. At age 60 you’ll be able to borrow 15% -20% of your home’s value and this generally increases by about 1% a year.

How it works

You stay in your home and don’t have to make repayments while living there. Interest charged on the loan compounds over time, so it gets bigger and adds to your borrowings. The interest rate is likely to be higher than on a standard home loan.

You repay the loan in full, including interest and fees, when you or your deceased estate sell your home. To get an indication of what a reverse mortgage will cost you over time, use the reverse mortgage calculator on the moneysmart.gov.au website.

Reverse mortgages taken out from September 18, 2012 have negative equity protection. This means you can’t end up owing the lender more than your home is worth (market value or equity).

It’s normally easier for older couples to get a loan than older singles, because usually couples have two sources of income and two super balances. Gender makes no difference. It really all comes down to your ability to repay the loan and your planned exit strategy if the loan extends beyond your planned retirement date.

Getting advice from an experienced mortgage broker can be a big help for older borrowers. Lees, who has been a broker for 14 years, helping older clients, says he has learnt a lot and firmly believes that most older borrowers benefit from using an experienced broker.

He points out, for example, some older people think they can only get a 10-year loan because of their age but a good broker may be able to get them 20 to 25 years.

Even though the borrowers may be able to pay the loan in 10 years, the longer term gives them much more flexibility, especially now that interest rates are on the rise, he says. The borrower could, for example, park any excess cash in an offset account while making the minimum repayments.

“Cash is the best buffer against rising rates,” says Lees.

A broker can help

First-time older borrowers also have to learn a whole new vocabulary and an experienced broker can certainly help with this, says Lees. And, most importantly, they can help clients negotiate all the hurdles, including emotions, of making a big decision.

“Owning property is the foundation of financial security,” he says

And for older people, the statistics speak for themselves. Those entering retirement with a fully paid off mortgage – even if you must raid your super to finalise your home loan when you stop working – are much better off than retirees who are renting.

Home ownership gives retirees a big leg up in retirement, according to the government’s 2021 Retirement Income Review. It found retiree households who own their home face lower housing costs. On average, housing costs are just over 5% of disposable income for couple homeowners versus about 25% of disposable income for renter couples. And those owning their home are less likely to face financial distress than retirees who rent. Almost 25% of retirees who rent privately are in “financial stress” versus only 5% or so of homeowner retirees.

And, of course, the value of the family home isn’t included in the assets test. So, retirees can own a valuable property and if their other assets are below the assets threshold, they still can qualify for the age pension. Even better, cash-poor retirees with a fully paid off home can get a seniors equity loan (reverse mortgage) to give them more money to live on. (See Equity release can top up your cash.)

Investment property

An exit strategy is not usually required for an investment property no matter the age of the borrowers, as you can

simply sell the property when you retire. This is, of course, assuming you also own a home.

“Lenders are required by law to make sure that they do not put you in a worse financial situation, and if your exit strategy consists solely of selling your

home, then that is considered to put you into financial hardship. So, in theory, if you own an investment property and still have a home, you won’t be in financial difficulty by selling the investment property,” says financial comparison site Canstar (canstar.com.au).