Retire in style
Money magazine founding editor Pam Walkley looks into the ins and outs of the reverse mortgage.
OWNING A PAID-OFF home is a great strategy for retirees and those heading into retirement. It’s the only asset not included in the test for a part or full age pension and the only investment that is capital gains tax-free when you sell.
Looming pension cuts due to a tighter assets test mean that, more than ever, the family home is shaping up as a passport to a more comfortable retirement.
There are several strategies that you could use to maximise the contribution your home makes to your retirement lifestyle, including downsizing, upsizing, improving and taking a reverse mortgage. Which one you choose depends on your circumstances. If you plan to retire soon, changes to the assets test for pension eligibility from January 1, 2017, make it worth considering spending some surplus income upgrading your home before retirement.
These changes, which lower the bar for access to part pensions from $1.17 million to $823,000 for couples (and from $788,250 to $547,000 for singles) means incomes of retired couples with super balances of more than $500,000 will be reduced by up to 19 per cent
(for those with $800,000 balances). The incomes of single retirees with balances of more than $300,000 will fall by up to 17.5 per cent ($500,000 balances) according to modelling from the Association of Superannuation Funds of Australia (ASFA). The new assets test will also increase the amount of super a couple needs to achieve a comfortable retirement, from $510,000 to $645,000, and from $430,000 to $545,000 for singles, according to ASFA, which calculates couples will need to spend $58,922
a year and singles $42,893 to live comfortably. If you have time on your side, do all you can to boost your super balance (see Super Booster Day, above).
If you’re already retired or close to it and have been canny enough to have a balance a little above the new pension cut-off thresholds, consider extensively upgrading your home or selling and buying a more expensive one to bring you under the new thresholds to receive a part pension. Retiring with a valuable home enables you to use it to fund your retirement. You can do this by either downsizing, selling and buying a cheaper home, renting out part of your home or taking a reverse mortgage, allowing you to borrow money using the equity in your home as security. This can be taken as a lump sum, regular income stream, line of credit or a combination of these.
You remain the owner of your house and can stay in it for as long as you want. Interest is charged, but you don’t have to make repayments while you remain in your home. You must repay the loan in full (including interest and fees) when you sell, die or move into aged care. The maximum amount you can borrow when you are 60 is usually around 15-20 per cent of your home’s value. Before deciding on a reverse mortgage, take account of all the risks, including the impact it may have on your pension eligibility. Interest rates are generally higher for reverse mortgages (about
6.5 per cent at time of writing) than for average home loans (below 4 per cent).
Your debt can rise quickly as interest compounds, leaving you without enough money for aged care or other future needs. To work out how it will affect you, use the reverse mortgage calculator at moneysmart.gov.au. For example, a couple, both aged 70, with a $700,000 home (growing at 3 per cent per annum) drawing down a lump sum of $200,000 at 6 per cent interest would see their equity reduced from 100 per cent to 52 per cent by the time they reached 85.
Yet you cannot end up owing the lender more than your home is worth, thanks to the introduction of “negative equity protection” by the federal government in 2012.