As you may be aware a reverse mortgage allows you to borrow money against the value of your home. In Australia, people often use the equity released via a reverse mortgage as ‘income’ to fund their retirement. Reverse mortgage continues to grow in popularity among seniors as the retirement funding shortfall for baby boomers starts to really bite in the community.
Although few Australians are aware of it, the government has a kind of ‘reverse mortgage scheme’ that has many advantages not offered by the private sector. The Centrelink and Department of Veterans Affairs have a Pension Loan Scheme wherein people who are on a part age pension can get a loan against their home or investment property. Just like any reverse mortgage, the loan is repaid once the property is sold. The loan serves as an additional income stream that when combined with the part-pension, gives them the benefit of maximum level of pension. The interest rate is also lower than the usual variable interest rates offered by reverse mortgage providers. The government reverse mortgage has a fixed interest rate currently of 5.25%.
Recently the Australia Institute argued though that the government scheme is available only for the wealthy retirees. Why is this so? Those retirees who own their homes, but are considered poor enough to be on full age pension, cannot access this government scheme. In short, only those Australian retirees who don’t have access to full age pension (because their wealth and income makes them ineligible) are able to enjoy and benefit from the government reverse mortgage scheme. In addition, those self-funded retirees who own property and ineligible for the age pension (because of income test or asset test) can also access the scheme. However, if they are ineligible for age pension under both tests, they won’t be able to access the scheme.
Therefore it’s perhaps no surprise the Australian Institute said that the government scheme is only available for those who need it the least. This compels most aged pensioners to use private reverse mortgage providers instead. After all, unlike the government scheme that is only limited and capped to the aged pension rate, retirees can borrow from a private sector reverse mortgage lender and take it as a lump sum – this is a major advantage. This gives borrowing power to a huge class of retirees who are on their full age pension and cannot access the government scheme. Read this for a full list of PROs & CONs to both the pension loans scheme and reverse mortgages that should be carefully considered.
The Australian Institute suggests that the government scheme should be available for every one of pension age. This should not be limited to rich people who are in the first place, ineligible for the full age pension because of their income or assets. If the scheme is made available for everyone, this will allow retirees who own property to potentially double their retirement income and live the rest of their lives to the fullest.
According to Australian Institute, this would not have a significant effect on the government’s budget if they open the scheme for everyone. What do you think? Do you think Centrelink should make the pension loans scheme available to every retiree? Tell us in the comments!
Regards, Darren
Who are the providers of lowest rates for reverse mortgages?
[…] More and more people will realise that as soon as they retire, they will have few savings in their bank accounts and yet, they are often too old for work and there are few options for improving income. Economic and demographic factors have affected our support system and things are changing before our eyes. The decline in birth rate means less people paying tax and increase in ageing population means more people running to government for support. There have been new set of reforms to address this issue, but as early as now, these reforms are being criticised to work only for rich individuals. […]
I agree this facility should be available to ALL pensioners who have worked hard , paid taxes and own their own home . Not just to those who are better off.
Thanks for the response Gary. Yes it does seem unfair. I would suggest that we will see some big change in the area of pension loans scheme and also home equity release / reverse mortgages more broadly, next year.