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 Reverse Mortgages and Gifting

Article By Paul Dwyer

The Bank of Mum and Dad has become a major source of funding for younger home-owners, either wanting to get into home ownership, or having financial assistance in meeting increased home loan repayments.

When Mum and Dad reach retirement age, often their home becomes their greatest asset and Reverse Mortgage borrowing may be the only means to provide assistance.

Whilst assisting children with a form of early inheritance is a noble act, care should be taken to ensure the following considerations.

When there are other siblings who will be future beneficiaries, a legal agreement or a revised Will should be prepared. This would indicate the gifting provided and any conditions, so that no beneficiary can be seen as been unfairly considered. A discussion with those other beneficiaries should be conducted as to the gifting decision.

It is important to consider potential needs that the elderly parents may incur in later years and that the amount of gifting shall not prevent them from being able to fund those needs.

Finally, consideration should be given to Centrelink implications for full or part pensioners. Gifting is regarded by Centrelink as a deprived asset and included in both income and asset calculations for a period of 5 years.

From 1st July 2023, a single person can have $301,750 in assessable assets, whilst a couple can have $451,500, before any reduction in pension payments.

From an assessable income perspective, the first $60,400 is assessed as receiving .25% return ($100,200 for a couple). Thereafter, income is deemed at 2.25%. These rates are frozen until 30th June 2024.

Government is yet to decide what to do with deeming next year. The last time the RBA cash rate was around 4.1% (4.25% April 2012), the deeming rates were 3.0% for the lower threshold and 4.5% for the upper threshold.

For any pension recipients thinking of gifting to assist family members, consideration should be given to the potential increases and pension ramifications.

When considering a Reverse Mortgage with a gifting purpose, also consult with a Reverse Mortgage broker with Centrelink knowledge.

Paul Dwyer has specialised in reverse mortgage and aged care lending for the past 20 years. The information is at 27th June 2023, general in nature, and does not take into account individual circumstances

senior man happy with cash reserve
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Why should I consider a “Cash reserve” in my Reverse Mortgage loan?

A Cash Reserve is simply funds in the reverse mortgage loan that are greater than your immediate needs. These funds remain in the loan and do not incur any fees or charges (including no interest charge) until you actually draw the funds down.

When considering borrowing funds via a reverse mortgage loan, it is important to consider your current needs, your intermediate needs, and your longer term or ‘Later Life’ needs.

IMMEDIATE NEEDS

For most people, there is usually a ‘trigger’ that leads to considering a reverse mortgage loan. Often, the trigger is to repay a mortgage loan or credit card debt, but other immediate needs include Home Improvements; Upgrade of the Car; Travel or to assist a family member.

INTERMEDIATE NEEDS

Many of our clients report difficulty in managing today’s costs of living whilst on pension or other ‘fixed’ incomes. One of the primary considerations here is to set up a regular monthly transfer of funds from the loan to the client’s bank account, to supplement their pension income. This is often between $500 – $1,000 a month and can have a dramatic effect on being able to manage the day-to-day costs of living!

Many clients use the regular monthly transfer to pay their medical benefits premiums, ensuring they have the maximum protection against illness as they grow older.

Other Intermediate needs include a future (planned) replacement of the car; home improvements; assistance for a family member; travel and/or holidays.

Longer Term or ‘Later Life’ needs.

A phrase I often use in discussions with clients is “As we grow older, we don’t know what the future may bring, but we can be pretty sure whatever it is will cost money!”

The older we get, the more likely we will need some medical assistance, including possible hospital treatments etc. Even when we have medical benefit membership, there are often significant ‘gap payments’ required. The Cash Reserve can assist with such costs.

Another consideration is when one partner of a couple needs in home aged care assistance or needs to be admitted to an Aged Care Nursing Home. The Cash Reserve can assist with such costs.

And perhaps the most important consideration is when a partner of a couple dies. The joint (couple) rate of pension is currently $744.40 each a fortnight. The single rate of pension is $987.40 a fortnight. If your partner passes away, your household income will reduce from $1,488.80 a fortnight to $987.60 a fortnight. That is a reduction of 33.66%!

Your living costs will not be reduced by anywhere like that amount – That is where a Cash Reserve is a vital component to ensure you can remain living comfortably in your home.

The reverse mortgage loan is in place until the last borrower ceases to live in the property.

Discussing all your needs (immediate, intermediate and ‘Later Life’) with your RMFS advisor at the time of setting up your loan can mean the difference in being able to remain living comfortably in your home for as long as you choose to!

Peter Bolitho

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Downsizing for Seniors

From 1st July 2022, homeowners selling their home that has been owned for more than 10 years, can contribute up to $300,000 (per person) into a superannuation fund. But is it a financial advantage.

senior couple reverse mortgage downsizingThe first consideration is the age pension and the second is property growth rates. Any amount contributing to a super fund for an age pensioner will be considered as an asset. This may affect pension entitlements.

Let’s look at the following 2 scenarios.

A 69 year old Single lady wants to fulfil her retirement years and is looking to use the equity in her home to enhance her later years. She is planning to sell her home for $1.4m and currently receives the full aged pension of $987.60 (eff. 21st March 2022). She intends to buy a two bedroom unit for $1.1m including costs. She would be left with $300,000 – the maximum she can contribute to super. Her current assets are home contents $10,000, car valued at $18,000, cash at bank of $25,000 and $65,000 remaining in super.
Whist her super will give her additional access to living out her dreams, there are two adverse effects in making this decision

– The growth in her future unit home will be far lower than the current freehold property. If the freehold family home grows at 5% per annum, after 10 years the property is forecast to be valued at $2.28m. If the growth in a unit is around 2%, the property is forecast to be valued at $1.34m. For comparison purposes, the difference between the options is forecast to be $940k.

– Age pension impact – As super would become an assessable asset, it is forecast that the current age pension of $987 p/f would become $545 p/f – a reduction of $442 p/f ($11,492 per annum). This lower payment would reduce further, when deeming rates are increased into the future.

A Couple aged 69 and 67 are retired, have a home valued at $2.0m and looking to downsize and buy an apartment valued at $1.4m including stamp duty of around $65k. This sale would allow them to put the maximum of $300k each into super. They currently have $340k in super, cars valued at $28k, home contents of $10,000 and cash reserves of $22,000. They each receive the full age pension of $744.40 p/f. ($38,708 per annum)
Whist their super will give them additional access to living out their dreams, there are two adverse effects in making this decision.

– The growth in the future apartment will be far lower than the current freehold property.
At 2% growth, the apartment would be valued at $1.63m in 10 years. The freehold family home, increasing by 5% per annum, would be valued at $3.26m in 10 years.

– As the contribution to super takes their assets over the threshold, they lose their total age pension payments of $38,708 per annum.

Whilst a decision to downsize may be formed around suitable accommodation for “ageing in place” needs, the financial results may lead to a lower asset position into the future.

A reverse mortgage is a strong option in these scenarios. If the purpose of downsizing is for providing additional income, consideration should be given to a reverse mortgage income stream to meet those needs. The result may lead to greater growth in an asset that is not assessable for age pension entitlements.

These scenarios are for illustration purposes only, and readers should contact Reverse Mortgage Finance Solutions to discuss their own circumstances.