If you're age 60 or over, own your home and need to access money, releasing equity from your home may be an option.
There is risk involved and a long-term financial impact. Get independent financial or legal advice before you go ahead.
How home equity release works
'Equity' is the value of your home, less any money you owe on it (on your mortgage).
'Home equity release' lets you access some of your equity, while you continue to live in your home. For example, you may want money for home modifications, medical expenses or to help with living costs.
Ways to access equity in your home include:
reverse mortgage
home sale proceeds sharing (home reversion)
equity release agreement
the Government's Home Equity Access Scheme (formerly the Pension Loans Scheme)
The amount of money you can get depends on:
your age
the value of your home
the type of equity release
Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you're signing up for.
Get independent advice
Before making the decision to apply for any home equity release, consider how it will affect:
your eligibility for the Age Pension
your ability to afford aged care
your ability to pay for future living expenses, medical bills and home maintenance
what you leave for others when you die
if someone lives with you, whether they will be able to stay in your home when you move out or die
If you are borrowing to invest, it puts your whole home at risk — not just the portion you are investing.
Talk to someone qualified and independent who can help you make an informed decision:
Get independent advice from a financial adviser - we can help, or legal professional.
Ask the Services Australia Financial Information Service how it will affect your pension or government benefits.
Reverse mortgage
A reverse mortgage allows you to borrow money using the equity in your home as security.
If you're age 60, the most you can borrow is likely to be 15–20% of the value of your home. As a guide, add 1% for each year over 60. So, at 65, the most you can borrow will be about 20–25%. The minimum you can borrow varies, but is typically about $10,000.
Depending on your age and lender policy, you can take the amount you borrow as a:
regular income stream
line of credit
lump sum, or
combination of these
How a reverse mortgage works
You stay in your home and don't have to make repayments while living there. Interest charged on the loans compounds over time, so it gets bigger and adds to the amount you borrow. The interest rate is likely to be higher than on a standard home loan.
You repay the loan in full, including interest and fees, when:
you sell your home
you move out of your home, or
your deceased estate sells your home
You may be able to make voluntary repayments earlier, if you wish. You may also be able to protect a portion of your home equity from being eroded by the loan. For example, to ensure you have enough money left to pay for aged care.
What a reverse mortgage costs
The cost of the loan depends on:
how much you borrow
how you take the amount you borrow (for example, a lump sum will cost more due to compounding interest)
the interest rate and fees (for example, loan establishment, ongoing fees, valuation)
how long you have the loan
Over time, your debt will grow and your equity will decrease (see the case study below).
See how much a reverse mortgage would cost over different time periods, such as 10 or 20 years.
Your lender or broker must go through reverse mortgage projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there's anything you're not sure about.
Negative equity protection
Reverse mortgages taken out from 18 September 2012 have negative equity protection. This means you can't end up owing the lender more than your home is worth (market value or equity).
If you took out a reverse mortgage before this date, check your contract. If it doesn't include negative equity protection, talk to your lender or get independent advice on what to do.
Home sale proceeds sharing (home reversion)
'Home sale proceeds sharing' (or home reversion) allows you to sell a proportion (a 'share' or 'transfer') of the future value of your home while you live there. You get a lump sum, and keep the remaining proportion of your home equity.
How home sale proceeds sharing works
The provider pays you a reduced ('discounted') amount for the share you sell. How much you get for the share depends on your age.
Terms and conditions vary. The provider may offer a 'rebate' feature. This means you (or your estate) get some money back if you sell your home (or die) earlier than expected. The amount you get back depends on when you sell your home and how much you got for your sold share. You may also have the option to buy back the sold share later, if you wish.
For example, suppose your home is currently worth $500,000 and you sell a 20% share of the future value. Depending on your age, the provider may offer you $37,000 to $78,000 to buy that share today. When you sell your home, the provider receives their share of the proceeds. Say in 20 years time you sell your home for $800,000. The provider gets 20% of the sale price ($160,000), minus any rebate (if applicable).
What home sale proceeds sharing costs
It's not a loan, so you don't pay interest. You pay a fee for the transaction and to get your home valued (as a guide, around $2,000). You may also have to pay other property transaction costs.
Home sale proceeds sharing costs you the difference between:
what you get for the share of your home you sell now, and
what it's worth in the future (minus any early sale rebate)
The more your home goes up in value, the more the provider will receive when you sell it.
Get the provider to go through projections with you, showing the impact over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there's anything you're not sure about.
Equity release agreement
An equity release agreement allows you to sell a portion of the value of your home. You get a lump sum or instalment payments in return. You live in your home and pay fees for the portion you've sold. A bit like paying rent on it. Your proportion of equity reduces over time, to cover the fees you pay.
How an equity release agreement works
One option is for one or more investors to buy portions of your home's equity through a property investment fund. You pay fees which are periodically deducted from the remaining equity in your home. The investor's share of your home's equity goes up over time, and yours goes down.
For example, suppose your home is currently worth $500,000. You sell 20% of your home's equity in return for a lump sum of $100,000. The fee charged by the fund may vary, depending on your circumstances and the agreement. If the fund charges an initial fee of $30,000, it may take $130,000 of your equity to cover both the lump sum and periodic fee.
Additional amounts of equity are deducted each time the periodic fee falls due (such as every 5 years). The fee is a set percentage of the fund's equity in your home. So, as the fund's share of equity increases, the fee goes up.
When the equity release agreement ends, and your home is sold, the fund gets their share of the proceeds. That is, the proportion of your home's equity they have accrued. You or your deceased estate get the remainder of the proceeds, if any.
The proportion of home equity you keep will reduce over time, and could even go down to zero.
Check your agreement to see what happens if your equity goes down to zero. Make sure you can continue living in your home, until sold by you or your deceased estate.
What an equity release agreement costs
It's not a loan, so you don't pay interest. Instead, you pay fees such as:
an application fee
periodic service fees, potentially deducted in advance from your home's equity
a fee to end the agreement
Get the fund to go through projections with you, showing the impact on your home equity over time. Get a copy of this to take away, and discuss it with your adviser. Ask questions if there's anything you're not sure about.
Home Equity Access Scheme
The Home Equity Access Scheme (formerly the Pension Loans Scheme) is provided by Services Australia and the Department of Veterans' Affairs. It lets eligible older Australians get a voluntary non-taxable fortnightly loan from the Government. You and your partner can use the loan to supplement your retirement income.
How the Home Equity Access Scheme works
The loan is secured against real estate you, or your partner, own in Australia. You can choose how much you offer as security.
You can choose the amount you get paid fortnightly. Your combined pension and loan payments cannot exceed 1.5 times the maximum fortnightly pension rate.
From 1 July 2022, you can get an advance payment of your loan (that is, a lump sum). This is in addition to, or instead of, your fortnightly loan payments. Taking up this option may reduce the fortnightly loan payment you get for the next year (26 fortnights).
There is a maximum amount of loan you can borrow over time. This is based on your (or your partner's) age and how much you offer as security for the loan.
What a Home Equity Access Scheme loan costs
You must repay the loan and all costs and accrued interest to the Government. You can make repayments or stop your loan payments at any time.
All loans have a negative equity guarantee. This means you won’t repay more than your home is worth (equity). Exceptions may apply.
For more information about the Home Equity Access Scheme, visit Services Australia or the Department of Veterans' Affairs.
Consider other options
If you need money, other options to consider include:
Government benefits — Check if you're eligible for the Age Pension or government benefits.
No interest loan — Lets you borrow a small amount of money quickly for essential goods or car repairs. There are no fees.
Downsizing — If you're thinking about selling your home and downsizing, consider the cost of buying and selling. Check if it affects your government benefits.
If you're considering any of these options, contact us today for more information.
Source: Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release
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