Media Feature: What is an equity release for seniors and retirees? (InfoChoice)

Michael Sauer was featured in this InfoChoice article discussing equity release options for seniors and retirees.

Given the phenomenal growth rates of Australian property over recent decades and Australia's 'ageing population', it becomes more important for retirees to understand their options as part of their retirement planning to avoid becoming 'asset rich, cash poor'. Some of the option questions we answer include:

1. What are the legal implications of signing up for a home equity release loan or a reverse mortgage?

Under both schemes a loan is secured against your house.

The government home equity access scheme always allows you to pay back the loan at any time, whereas a reverse mortgage provider may charge break costs for early repayment of the loan.

2. What are the impacts of home equity release loans on the borrower’s estate and beneficiary entitlements?

Both loans have a non-negative equity guarantee meaning the value of the loan cannot exceed the value of the property and create a debt beyond the value of the property. This means that the other assets of the estate beneficiaries are protected from the loan obligation.

3. What are the impacts on social security and/or DVA entitlements and potential future aged care costs? 

The government home equity access scheme loan proceeds are except from both the income and asset test.  By contrast, the first $40,000 of an unspent home reverse mortgage is an exempt asset for 90 days only and then it is asset tested and deemed for the income test.

4. Suppose an individual meets all requirements for either a reverse mortgage or the HEAS, which one should they consider? Is one better than the other, and in what ways?

From a cost perspective, the government home equity access scheme will always be cheaper. The current interest rate applied to the home equity access scheme is only 3.95% which is actually below the current RBA cash rate of 4.35%. By contrast, reverse mortgage interest rates are around 8-9% currently. Reverse mortgages also often have establishment costs of a few thousands dollars.

However, reverse mortgages are often used when clients require access to a greater level of funds. Reverse mortgages often allow you to borrow up to 20% of the house value upfront whereas the government home equity access scheme only allows a yearly payment of 150% of the full age pension rate. In this example, if a couple are already receiving the full yearly age pension of $43,752, they can only access an additional 50% or $21,876 per annum.