You can access the equity in your home by either a:
Home Equity Loan - borrowing against the equity in your home.
Home Reversion Scheme - selling a portion of your home.
We are going to focus this article on Home Equity Loans. If you require more information on Home Reversion Schemes, please contact us below.
Home Equity Loan basics
A home equity loan releases money from a home in the form of a lump sum or as regular payments.
A home equity loan (otherwise known as Reverse Mortgage), is a loan against the equity (accumulated value of your home net of any debt) that generally only requires repayments at the end of the loan, not during the loan. The interest and fees are capitalised to the loan.
The loan is generally repaid after a trigger event such as moving out of the home, sale of the home or death. At that time, the outstanding loan, which includes the compounded loan repayments, must be repaid.
People use the home equity loan for a range of purposes including:
Cashflow: To live a more comfortable lifestyle with regular drawdowns.
Lump Sum Payment: To pay large expenses such as medical procedures or Aged Care costs.
There are two sources of home equity loans:
The Australian Government using the Home Equity Access service (previously known as the Pension Loan Scheme)
A bank or lender
We are going to focus on the Australian Government's Home Equity Access service (HEAS). For more information on using a lender, see Money Smart or your bank/mortgage broker. Reverse mortgage calculator - Moneysmart.gov.au
Importantly, you do not have to be receiving the Aged Pension to eligible for the HEAS, you just need to be eligible and assessed with a pension of $0 or higher.
How much can be borrowed?
The formula below is used to caluclate the maximum loan amount under HEAS.
Age Component Amount x ( Value of real assets / $10,000 )
Age Component Amount is determined by the Secretary and ranges between $1710 for someon 55 or younger and $6750 for someone 90 or older.
Value of Real Assets is generally the value of the property less any amount nominated to be kept aside.
Jack and Joan own a home worth $1.2 million. Jack is 70 and Joan and 69. The maximum amount they can borrow is based on the younger one, in this case, Joan's age component amount of 69: $2960.
$2960 x ( $1,200,000 / $10,000) = $355,200
If Jack and Joan wanted to exclude an amount from the calculation for inheritance purposes, say $400,000, the maximum amount they could borrow would be:
$2960 x ( ( $1,200,000 - $400,000 / $10,000) = $236,800. This amount is revised annually based on property value changes and ages.
Maximum Annual Amount
The above amount is the total the loan can get to however under the HEAS there is also a maximum annual amount that can be borrowed and it is 150% of the Aged Pension amount including allowances except the remote area allowance. This 150% includes any Age Pension payment received.
For example, as at 21 March 2023 if you are a couple and receive 50% of the Age Pension amount of $1604 including allowances per fortnight which equates to $802. Then they would be eligible to borrow $1604 / fortnight (150% - 50%) or $41,704 per annum.
As at 21 March 2023, the interest rate is 3.95% pa. This is subject to change. As at the date of writing, it may be lower than the standard variable rate for a home loan.
No Negative Equity guarantee
Recently on 1 July 2022, the government introduced a no negative equity guarantee (NNEG) on the HEAS. This means that the value of the loan can not exceed the value of the property so that they will not have to repay more than the market value of the security.
The property used to secure the HEAS is Australian Real Estate and can be the home or an investment property that the borrower has an attributable interest in.
It is important to understand the impact of captalisation of interest on the loan. If you have the loan for 10 years, the loan could increase significantly. As the interest is not paid each month, it is captialised onto the loan and next month the borrower capitalises more interest on the interest.
This graph shows the capitalisation of Jack and Joan borrowing the maximum they can each month on the HEAS ($41,074 pa). The term is 15 years and they withdraw just over $788,000 whilst the loan ends up being $1.05m against a home worth $2.16m (assumptions below). The compounded interest cost is roughly $265,000.
Impact on Estate - taking out a reverse mortgage or REAS will decrease the assets available in the estate for your loved ones. It could leave insufficient to balance out inheritances if you have given an early inheritance to one child and not another. For more information on ways to manage this, read our Estate Planning insight posts.
Impact on future Aged Care costs - money from a home equity conversion loan is included as income in the Aged Care cost assessment. This will impact the Home Care assessment and possibly the Residential aged care assessment.
Travel outside of Australia - you must remain eligible for the age pension and HEAS if you are travelling outside of Australia.
Ongoing reqirements include the property being adequately insured and well maintained.
The Home Equity Access Scheme can allow home owners to top up their cash flow without having to sell their home. There are other options that could be considered including downsizing, granny flat arrangements or selling a portion of the house. Which one will be suit you will depend on your circumstances now and in the future. If you would like us to crunch the numbers for your various options, please get in touch.
Assumptions & Links:
Inflation rate is 3%pa, growth rate is 4%pa, interest rate is 3.95%pa, age at start 69.