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Reverse Mortgage and Age Pension Entitlements

Many older Australians value their age pension payments. For the majority of recipients, the use of a reverse mortgage will have no effect on current entitlements.

Each age pension recipient is assessed on both their assets and income to determine their pension payment.

Maximum assets for Full pension

From 21 September 2021, pensions reduce when your assets are more than the limit for your situation.

Your situation Homeowner Non-homeowner
Single $270,500 $487,000
A couple, combined $405,000 $621,500

Maximum assets for Part pensions

From 21 September 2021, part pensions cancel when your assets are more than the limit for your situation.

Your situation Homeowner Non-homeowner
Single $593,000 $809,500
A couple, combined $891,500 $1,108,000

With a Reverse Mortgage, up to $40,000 is exempt from the assets test for up to 90 days, so the money needs to be spent within this time limit to avoid it becoming an assessable asset. If $50,000 is used for home repairs/maintenance on the principle place of residence, (an exempt asset), the monies spent will not be included as an asset. If the $50,000 is to pay for a new car, the value of that car then becomes a non-deemed asset.

Advisers are required to have a discussion with potential borrowers about future needs and many discussions lead to having a Line of Credit structure into the loan facility to meet any future needs, if and when they may occur. From an age pension perspective, it is important to know that a Line of Credit is not regarded as an asset.

 

 

 

Assessable income on financial assets

The Government has amended deeming rates from 1st May 2020 (and current as at 1 November, 2021).

Situation Deeming rate
Single Lower rate: 0.25% on the first $51,800 of your investment assets, plus
Upper rate: 2.25% on your investment assets over the amount of $51,800
Couple Lower rate: 0.25% on the first $86,200 of your combined investment assets, plus
Upper rate: 2.25% on your investment assets over the amount of $86,200

 

Gifting

Centrelink will assess any gifting amounts over $10,000 in one year, or $30,000 over 5 years. Amounts over these limits will be deemed. If a single person has no other assessable assets, it could be possible to use a reverse mortgage for gifting purposes of around $190,000, without affecting age pension entitlements.

Centrelink is the ultimate source for determining age pension entitlements , but an adviser from RMFS will assist potential borrowers with basic information about their qualifications.

It is important to ensure age pension recipients regularly update their information with Centrelink. In the first 3 months of 2020, our advisers have met 3 clients whose details have not been updated to reflect their circumstances, and have missed out on between $16,000 and $30,000 over the past 3 years.

 

Are you eligible for the full age pension?

From 21st September, 2021, the full age pension is $967.50 p/f for a single and $729.30 each per couple.

We recommend recipients check their payments to reflect their current asset and income position.

Marguerite Taylor No Comments

Are you considering a home reversion scheme?

For seniors investigating their options for finance during their retirement, home reversions schemes might come up as a potential option.

A Home Reversion Scheme is not a loan but is more accurately described as a real estate transaction – you are selling a portion of your home. The transaction does not come under the Credit Act and its consumer protections.

Home reversion schemes in Australia are only available in Sydney and Melbourne and even then not in all postcodes.

It is a part sale of a future share of the sale proceeds of the home, at a discounted rate against its future value. The amount the Home Reversion Scheme owner actually receives of the original percentage when the home is sold, varies over time and depends on sale price – sounds complicated? Yes, it is.

An example

A 70yo female seeking to access 10% of her home valued at $500,000 (ie $50,000) will be asked to sell the Scheme a substantially larger portion of the future value of her home.  The percentage actually payable at the time of the subsequent sale of the property is subject to many variables and potential outcomes, although limited to the actual proportion sold, can be hard to forecast.

Reversion schemes offer lump-sum funding only.  Although lump sums are available via a reverse mortgage our experience is that most people (in excess of 90% of our clients) want not only a lump sum but also to set aside funds for future use by way of line of credit and/or a regular income stream for a predetermined period of time.  These options can be set up at the time of the initial application and eliminate the need to reapply to the lender for more funds later.

This flexibility is also important as it relates to overall costs as interest on a reverse mortgage is calculated on the amount drawn. So, if you don’t want all the available funds upfront the overall interest expense will be lessened by taking it as you need.

It is worth noting that Home Reversion Schemes may offer a higher lump sums than the amounts allowed by a Reverse Mortgage lender.

In our opinion, a Reverse Mortgage compared to a Reversion Scheme can provide you with more flexibility and options to meet your long term needs.

Are you interested in finding out your finance options in retirement? Contact us today for a discussion with an expert who can listen to your needs and find the right solutions to fit.

Marguerite Taylor No Comments

More people are retiring with high mortgage debts.

The number of mature age Australians carrying mortgage debt into retirement is soaring.

And on average each mature age Australian with a mortgage debt owes much more relative to their income than 25 years ago.

Microdata from the Bureau of Statistics survey of income and housing shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement.

More mortgaged for longer

For home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%.

Among home owners aged 45 to 54 years, it has doubled.


Source: Authors’ own calculations from the Surveys of Income and Housing

Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group.

In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82% to 169%.

For those aged 55-64 it has blown out from 72% to 132%.

Source: Authors’ own calculations from the Surveys of Income and Housing

Three reasons why

The soaring rates of mortgage indebtedness among older Australians have been driven by three distinct factors.

First, property prices have surged ahead of incomes.

Since 1970 the national dwelling price to income ratio has doubled.

Prices and wages in 1970 are assigned an index of 100. Sources: Treasury, ABS, Committee for Economic Development of Australia

Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, potentially shortening the the remaining working life available to repay the loan.

Second, today’s home owners frequently use flexible mortgage products to draw down on their housing equity as needed for other purposes. During the first decade of this century, one in five home owners aged 45-64 years increased their mortgage debt even though they did not move house.

Third, older home owners appear to be taking on bigger mortgages or delaying paying them off in the knowledge that they can work longer than their parents did, or draw down their superannuation account balances.

Super could be changing our behaviour

For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts prolong working lives.

In 2017 around 29% of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from 25% four years earlier.

In the Netherlands, where a mandatory occupational pension scheme along the lines of Australia’s super scheme has been in place for much longer, over one-half of home owners aged 65 and over are still paying off mortgages.

The base is the total number of uses of lump sums rather than the number of people taking lump sums. ABS 6238.0 Retirement and Retirement Intentions

The implications are huge

Internationally, studies have found that indebtedness adds to psychological distress. The impacts on wellbeing are more profound for older debtors, without the ability to recover from financial shocks.

Debt-free home ownership in old age used to be known as the fourth pillar of the retirement incomes system because of its role in reducing poverty in old age. It allowed the Australian government to set the age pension at relatively low levels.

Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the age pension.

Mortgage debt burdens late in working life will also expose home owners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages.

During the first decade of this century, around half a million Australians aged 50 years and over lost their homes.

Taxpayers will be under pressure to help

Those losing home ownership are often forced to rely on rental housing assistance. Moreover, as older tenants they are unlikely to ever leave housing assistance. This will put pressure on the government to boost spending on housing assistance, which is likely to further boost demand for housing assistance.

Super and government housing assistance could become the safety nets that allow retirees to escape their mortgages.

It wasn’t the intended purpose of superannuation, and wasn’t the intended purpose of housing assistance. It is a development that ought to be front and centre of the inquiry into the retirement incomes system announced by Treasurer Josh Frydenberg.

It is a change we’ll have to come to grips with.

Original article can be found here.