This week, I am delighted to introduce our guest advisor, Craig Hall from the National Information Centre on Retirement Investments (NICRI).
The NICRI is a government funded, independent consumer agency providing information to the general public on investment products and Equity Release options.
In the first of three articles, Craig explains what equity release is, and whether the benefits outweigh the risks given individual circumstances, and both your current and future needs.
Many seniors are asset rich and income poor due to a number of reasons. For example, they may have accumulated their wealth in their home and may not have had access to superannuation during their working life. Equity release can provide senior homeowners with a solution to access adequate cash to enhance their overall lifestyle and financial well-being.
INTRODUCING CRAIG HALL
Equity Release – What is it? Equity Release is a way seniors can access money (equity) in their home without the requirement to make repayments or fulfil the contract with the provider until a trigger event occurs. (A trigger event being a situation that occurs that means the loan needs to be repaid or the transaction needs to be settled. The most common triggers are the death of the homeowner or the homeowner moving out of the secured property to an aged care facility for example.)
They also allow the senior homeowner to remain in the property. If used appropriately, and with full understanding from the outset, they can be a useful tool for certain seniors throughout their retirement years.
Equity Release products now come in various forms, each with potential benefits and pitfalls unique to everyone’s personal situation, needs and objectives. More recently, the market has expanded with new providers as well as providers that have re-entered the market.
Despite the range of products and options expanding, a few basic issues are applicable to all and need to be considered:
Purpose – The sole purpose of accessing the equity in your home should be to cover necessary expenses that cannot be covered by other means. This may be through regular payments to cover day to day living expenses, a lump sum to cover an unexpected cost or a combination of both. It is important to explore all avenues prior to application to determine which option will best meet your needs. Also check to see if other investment funds are available or an unwanted or non-productive asset can be sold.
Elder abuse – Be aware of pressure from a third party such as non-dependent children, family friends and neighbours, as often this can result in a detrimental outcome.
For instance, an elderly lady was pressured by her son to borrow the maximum amount available to her and give him the proceeds for a business venture. Unfortunately the son’s business venture failed, which left the elderly lady with a growing debt, therefore reducing her options for accessing equity later in life for other purposes such as aged care. Another issue she faced is that when she advanced money to her son she exceeded the ‘gifting rules’ which meant that her age pension entitlement was reduced. It was clear in this case that while her and her son’s intentions were good, a lack of information and advice has cost her significantly in financial and retirement living terms.
Reduction of equity – Regardless of which type of equity release product you choose, the trade-off for accessing a portion of equity now is that you will have a reduction in equity of your home (in percentage terms) at the end. Try to get as many case scenarios as possible when investigating the available products to give you an understanding of what may eventuate down the track with regard to how much equity may be left.
Rights – While you may have to meet certain obligations, you also have rights. It is important to understand your rights as a holder of an equity release product. These include your ability to stay in your home until a trigger event occurs, your right to access the status of the loan or facility as well as other relevant information, and your right to be treated fairly and that you have not been led into a facility that was inappropriate.
Advice – One of the most important parts of the application process is seeking professional advice. This includes both legal and financial advice. Seeking legal advice ensures you are aware of the various terms and conditions of the contract, including your own obligations. Financial advice shows the potential outcome of using an equity release product including issues such as any impact on Government Income Support entitlements, the effect of compound interest if applicable, other options that may be explored, optimising cash flow and may highlight potential future limitations to life stage events such as aged care. Many of these issues can also be explained by the Department of Human Services, Financial Information Service (FIS) staff and by organisations such as NICRI Inc.
Once it is established that accessing the equity in your home should be considered as a solution to freeing up cash, the next step is to understand the options available. In the next article we will look at the various forms of Equity Release.
For information on Equity Release products and options – Refer to the NICRI booklet ‘Accessing the Equity in Your Home’ which is available by contacting NICRI Toll free on 1800 020110 or via email firstname.lastname@example.org or write to PO Box 1339 Fyshwick ACT 2609. You can also visit www.nicri.org.au to access a wonderful source of information, tools and calculators to help you make informed investment decisions for comfortable living in retirement.
Craig Hall is the Executive Officer Media and Communications at the National Information Centre on Retirement Investments (NICRI) Inc. with responsibility for media and research. He produces the range of NICRI publications and factsheets covering superannuation, retirement income streams, investments, financial planning, equity release and redundancy for the general public. Before joining NICRI years ago, Craig worked in the investment and finance industry over a period of 13 years. Craig writes a number of articles for senior’s publications and contributes to discussion/consultation papers for Government.