This week, our guest Craig Hall from the National Information Centre on Retirement Investments continues his advice on equity release options for seniors. NICRI is a wonderful source of information, tools and calculators to help you make informed investment decisions for comfortable living in retirement.
In his second article, Craig explains the various (and somewhat complex) options available for releasing equity in the family home.
Equity Release – What are the Options?
In the previous article we looked at the use of Equity Release as an option for senior Australians to free up cash to cover one-off expenses or supplement income requirements. Equity Release comes in a number of various forms. It can therefore be quite confronting and confusing to understand and to make a decision on which would be the best option for your circumstances.
So let’s look at the various options available that allow seniors to access the equity in their homes:
A reverse mortgage is a loan provided where interest and other costs accumulate and repayment is not required until a trigger event (such as death of a spouse) occurs. Providers can lend up to a regulated maximum percentage of the value of the secured property, based on the age of the youngest borrower/homeowner. The proceeds can be taken either as a lump sum, regular payments or a combination of both.
For Government Income Support (GIS) purposes the first $40,000 of the drawn proceeds that remains unspent is assessed after 90 days and any unspent drawn amount above $40,000 is assessed immediately.
Shared Sale Proceeds Arrangement
Seniors can enter into a part-sale transaction and receive a lump sum cash payment in exchange for a share of the property’s future value. The facility is available for eligible property types in certain locations. The amount received is a smaller percentage of the present value of the share being sold because the senior/s retain all ownership rights and responsibilities for the rest of their lives.
Assessment for GIS is the same as reverse mortgages.
Enables access to the future capital growth of the home as an income stream. The homeowner agrees to sell their home to an investor at an agreed value at a future time of their choosing, in exchange for a monthly income from the investor.
It is possible for the homeowner and investor to share in the capital growth of the property, however this reduces the amount of the monthly payments received by the owner. The homeowner retains full ownership of and responsibility for the property until the eventual sale and change of title takes place.
Payments received are not assessed as income for GIS.
Pension Loans Scheme (PLS)
Property owners of age pension age who do not receive a pension, or receive a part pension, can borrow payments up to the full pension against their property. If the debt is secured against an assessable asset, the actual pension payment may increase as the net value of the asset reduces, thus reducing the ‘top up’ or borrowed component.
Downsizing can free up equity while maintaining full home ownership. This is simply selling the existing home and purchasing a property of lesser value. Any surplus funds are then available for use. Costs involved include stamp duty, agent’s fees, marketing fees and relocation costs.
As you can see, it can be daunting to not only understand each product but also to make an informed decision to choose the most appropriate for your circumstances.
Avoiding potential pitfalls
As with any major decision-making it is important to investigate all the benefits, conditions and potential pitfalls. The following is a list of handy tips for consumers considering equity release to ensure inappropriate decisions are not made.
- Check if the provider is prudentially regulated and holds an Australian Credit Licence if required.
- Check with the Department of Human Services (DHS) to see if it will affect your Government Income Support entitlements.
- Check if the facility is portable in case you wish to move house and retain your equity release product in the future.Seek professional legal and financial advice.
- Check if you face any penalties or fees should you choose to exit the scheme, whether retaining or selling the property at a time of your choosing.
- Ask the provider what your obligations are as far as maintenance on the property is concerned.
- Ensure that, where applicable, regulated consumer protections are being met according to the National Consumer Credit Act 2009, such as offering a ‘No Negative Equity Guarantee’, providing you with a thorough pre- assessment for suitability of the product and providing the appropriate documentation and projections.
- Ensure that your insurance cover is adequate.
- Find out what your rights are if something goes wrong or a dispute arises and what external dispute resolution scheme your provider belongs to so you know where to go if you have a problem.
- Find out what restrictions an equity release product will have on you in the future – for example if you wish to renovate or need to move into aged care.
- Ask the provider questions about themselves such as how long have they been in business, can they give you any customer feedback and how can you deal with them in the future.
While potential problems may arise from accessing the equity in your home, being prudent in investigating and understanding all aspects thoroughly and seeking professional legal and financial advice will provide clarity and peace of mind.
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.