Nicholas Taylor No Comments

Loan Scenario of the Week (28/07/2023)

Lyndall (74) lives with her husband George (80) in the house in the Blue Mountains. George has dementia, and Lyndall has signed on his behalf as a Power of Attorney.

This loan is to pay off several debts that have built up over time. This is because the costs of living and the extra expenses to look after George has pushed the couple to living right on line of their pension incomes. They have 2 financial arrangements from when they were retiring that they have been paying off for over 10 years.

Lyndall has taken out a Reverse Mortgage to pay out these debts, and have some additional funds to supplement their pension income and money for one of large expenses. Lyndall is also worried that they could incur further large expenses in caring for George. The Reverse Mortgage will make funds available for this purpose.

This loan has given Lyndall great peace of mind in an already difficult time, she can now concentrate on caring for George and not having to worry about their finances.

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

Nicholas Taylor No Comments

 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