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Loan Scenario of the Week (07/07/2023)

Janette (aged 83) lives in her home in Sydneys Inner West. Her husband died several years ago, and she only has one son, Patrick.

Janette has around $200,000.00 in savings and shares. She relied on the pension for her income and receives a small amount of interest and dividends from her investments.

Janette has a Reverse Mortgage with a balance of approximately $60,000. She took out this Reverse Mortgage in 2018 to assist her son Patrick and his family. As Patrick is her only beneficiary, she wants to assist him now rather than him waiting to receive his inheritance. 

Jannette is looking to increase her Reverse Mortgage as she wants to give Patrick another $50,000.00. She will give him the funds from her investments as this will have a nil effect on her pension. By gifting him the $50,000 it will increase her Centrelink assets but the reduction in her investments will mean a net nil effect. Jannette has visited a Centrelink Financial Information Service Officer who suggested this strategy. 

Jannette wants to have $200,000 available for her future care and property maintenance. By having the increase limit on the Reverse Mortgage, along with her cash and shares, she will still have approximately $200,000 available. 

The cost of doing the increase with her current Reverse Mortgage Lender is the same as refinancing with a different lender. So, we are refinancing the whole loan to a different lender that has a significantly lower interest rate. 

The loan is not for ongoing expenses but to make sure she has funds in future for in home care and property maintenance. It has allowed Jannette to help Patrick considerably and she gets to enjoy watching the relief receiving this early inheritance has brought to her son.

(Names, locations, amounts, & other personal details have been changed to protect the client’s identity.)

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Loan Scenario of the Week (30/06/2023)

Mary and her husband Ian live in their unencumbered home in the Sutherland Shire.

They are looking to do a Reverse Mortgage as they need to replace their motor vehicles it is old and costing a lot in maintenance. Their air conditioning unit has also broken, and they need funds to replace it. The house needs some minor cosmetic repairs, and they would like some funds to continue to maintain their property. 

They are comfortable living on the aged pension but want to have funds for one off expenses and discretionary costs in the future. The wish to take out a Reverse Mortgage of $110,000 to spend $30,000 on a car, $20,000 on the aircon and minor repairs and then a cash Reserve of $60,000 for one off expenses.

The loan is not for regular ongoing income or expense support. If they needed too they could increase the limit of their loan substantially in the future. This loan is so small that the property is likely to appreciate faster than the interest will accrue, especially as clients are only charged interest on what they have drawn down not the whole facility.

(Names, locations, amounts, & other personal details have been changed to protect the client’s identity.)

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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