Federal government changes to the Pensioners Loan Scheme allowing retirees to boost their income through a reverse mortgage on the family home are about to take effect in July. However, Aussies need to consider the downsides that come with the program.
The amendments to the existing Pensioners Loan Scheme were announced in the 2018 federal budget. The changes have two key components making the scheme more accessible to a greater number of retirees.
The amended Pensioners Loan Scheme will now be open to full-aged pensioners and self-funded retirees. Previously, only eligible pensioners were able to access the scheme.
In addition, the amount available to be borrowed has increased to up to 150% of the maximum fortnightly pension rate.
"A reverse mortgage could be a way for cash-poor retirees to unlock equity in their homes to help pay for day-to-day expenses," AMP Technical Strategy Manager John Perri said.
AMP's modelling showed that a single person would be able to borrow up to $36,000 per year, while a couple could borrow up to $54,000 a year, paid in instalments every two weeks.
Part- or full-age pensioners can borrow the difference between the current age pension and the maximum 150% rate.
Therefore, a single person on a full-age pension of $24,000 could borrow up to $12,000 against their home each year, bringing their total cash flow from the age pension and the loan to the maximum of $36,000.
A reverse mortgage enables retirees to increase their cash flow, while staying in the family home. However, it is not suitable for everyone, and retirees must assess the risks before applying for the loan scheme, according to Perri.
The most important consideration would be the reverse mortgage reducing the value of a family home when it is sold.
"Under the government’s Pensioners Loans Scheme retirees are charged a compounding variable interest rate of 5.25% per annum," Perri said. "When the family home is sold, the amount owed will be deducted from the sale price of the home. Interest is added to the outstanding loan balance each fortnight until it is repaid in full. The longer it takes to repay the loan, the more interest is paid."
The Pensioners Loan Scheme also provides an opportunity for retirees to free up some equity that they have in their home. This might help bridge the funding gap while looking to secure aged care or while they await an aged-care assessment.
“The downside is that their estate often will be left to pay the outstanding loan, potentially leaving less inheritance to the kids. Retirees should carefully consider their personal situation to work out if this is a viable option for them,” said Perri.
It is very difficult for a specialist in investment advice to understand the needs of those who are not as fortunate. For AMP to come out with this warning shows they don't understand the overall retiree population. With the evidence presented in the Royal commission, it would be better for AMP to take a more neutral position, or at least give an even perspective, rather than worrying about younger Australians getting their full inheritance without helping their parents along the way.
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