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Mike Reynolds
Mike Reynolds

Director / Adviser

Melbourne

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Downsizing, reverse mortgages and the Pension Loan Scheme: Using the equity in your home to generate more money in retirement

In their 2018 Retirement Income Report based on a survey of 7,305 Australians over the age of 40, Australian research firm, Investment Trends, revealed that only 46% of Australians feel prepared for their retirement. Of these, only 25% believe that they will live comfortably in retirement. Will that really be comfortable enough for you or will you better off with FMD's No Compromises standard?

ASFA Retirement Standard Annual living costs Weekly living costs
Couple - modest $39,353 $754
Couple - Comfortable $60,264 $1,154
Single - Modest $27,368 $524
Single - Comfortable $42,764 $819

Source: ASFA Retirement Standard

FMD 'No Compromises' Retirement Annual living costs Weekly living costs
Single $80,000 $1,538
Couple $100,000 $1,923

In addition, the report states that 51% of retirees expect to outlive their retirement savings. If you expect to live on more than the Age Pension (full Age Pension rates plus supplements are $35,916 for a couple, or $23,824 for a single person, applicable since 20 September 2018), you will need to use smart strategies to find the additional income.

Ever considered downsizing, utisling reverse mortgages or the Pension Loan Scheme?

Unlocking the equity in your home can be an effective way to achieve your lifestyle goals and generate more income in retirement. However, it will also reduce the size of your estate and the amount of wealth you can pass to the next generation. We explore the pros and cons of the three main financial strategies.

Option 1: Downsize your home and invest or live off the proceeds

What is it?
Selling your home to move to a smaller, lower-cost home to free up cash to invest and create an income stream.

Pros
Frees up cash and allows the money to be reinvested tax-free into superannuation. From 1st July 2018 those aged 65+ can invest up to $300,000 ($600,000 per couple) from the proceeds of the sale of a primary residence (held for 10 years or more) into their super fund and then draw an income stream. Money can be invested on top of the $1.6 million contributions cap and is not impacted by the work test. Read more about the opportunity for downsizers to boost thier superannuation here.

Cons
The proceeds of the sale are assessable for the Age Pension Assets Test, so it is likely to reduce your Centrelink Age Pension. For those in aged care, it will also increase assessable assets and is therefore likely to increase aged care fees.

Option 2: Use a reverse mortgage to unlock home equity

What is it?
A reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as security.

Pros
Delivers additional income throughout retirement and providing you draw-down on your reverse mortgage as an income stream it won’t be assessable for Age Pension or aged care purposes.

Cons
Interest rates are typically higher than for other type of loans and debt can grow quickly due to compounding.

Option 3: Use the Pension Loan Scheme (PLS) to generate more income

What is it?
The Pension Loan Scheme (PLS) is essentially a reverse mortgage provided by the government. The government takes a stake in your home and receives the money back (with interest) from your Estate.

From 1st July 2019 anyone of Age Pension age will be able to access the PLS. Maximum rate age pensioners can borrow up to 50 per cent of the maximum rate of fortnightly Age Pension, part-rate age pensioners can increase their fortnightly payment up to a maximum of 150% of full Age Pension, while self-funded retirees will be able to borrow up to the full 150% of the maximum rate Age Pension.

Pros
A relatively straightforward way to generate additional retirement income without leaving the family home. The interest rate charged (currently 5.25% p.a.) is typically cheaper than a reverse mortgage from a bank.

Cons
Unlike a reverse mortgage from a bank, PLS income will be included in aged care means testing, so using the scheme while in aged care may significantly increase costs.


Picking the right option for you

The Retirement Income Report also revealed that when seeking help with their retirement goals, 33% Australians are most inclined to turn to a financial planner, and 25% to their super fund, for assistance. Whether you choose to get professional financial advice or go it alone, the key to a comfortable retirement lifestyle is to act now. If you'd like to speak to an expert, you can book a consultation with me or one of my colleagues by clicking the link below. There is no charge for the first meeting so it's a great opportunity to see if we can help you acheive your retirement goals as we have helped so many others. But don't take my word for it, see what our clients say.

Retain your family home while tapping into your equity


General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.