A Reverse Mortgage can be a lifeline for many retirees, offering the chance to unlock the equity in their homes and gain access to additional funds.
However, the decision to take out a Reverse Mortgage should be made with an understanding of how it can impact existing pension entitlements.
How Reverse Mortgages Work
A Reverse Mortgage is a type of loan available to homeowners aged 60 and older, allowing them to convert part of the equity in their home into cash.
Unlike traditional mortgages, Reverse Mortgage borrowers are not required to make monthly payments. Instead, the loan is repaid when the homeowner:
- sells the house
- moves out permanently
- or passes away
The amount that can be borrowed depends on the borrower’s age, the value of the home, and current interest rates.
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Implications on Pension Entitlements
Pension entitlements, such as those provided by Centrelink in Australia, are subject to means tests that include both asset and income tests.
Understanding how a Reverse Mortgage interacts with these tests is crucial for managing entitlements effectively.
1. Assets Test
The assets test assesses the value of assets you own to determine your eligibility for pension payments.
While the primary residence is generally exempt from this test, the funds obtained from a Reverse Mortgage can be considered as assessable assets if not immediately used for exempt purposes.
- Example: If you take a lump sum from a Reverse Mortgage and places it in a bank account or invests it, these funds may count towards the assets test, potentially reducing their pension entitlements.
2. Income Test
The income test evaluates income from various sources, including investments, to determine pension eligibility. While the principal amount of a Reverse Mortgage drawdown is not considered income, any returns generated from investing these funds are.
- Example: If you use a Reverse Mortgage to fund purchase of an investment property or stocks, the income generated from these investments will be included in the income test, which could lower their pension benefits.
Specific Uses and Their Implications
The impact of a Reverse Mortgage on pension entitlements largely depends on how the funds are used. Here are some common scenarios:
Home Renovations and Improvements
Funds used for home improvements are typically exempt from both the assets and income tests. This use of funds has no impact on pension entitlements.
- Example: You use $50,000 from Reverse Mortgage to renovate your kitchen and bathroom. Since the funds are directly used for home improvements, they are not considered assessable assets or income, leaving your pension unaffected.
Medical and Health Expenses
Similar to home renovations, using Reverse Mortgage funds for significant medical expenses generally does not impact pension entitlements.
- Example: You allocate $30,000 from your Reverse Mortgage for a major surgery and ongoing medical treatment. These expenses are considered exempt, and your pension remains intact.
Gifting Money to Family
Gifting large sums to family members can have serious implications. Centrelink has strict rules about gifting, which could result in the gifted amount being treated as a deprived asset for up to five years.
- Example: You give $20,000 from your Reverse Mortgage to your daughter. Centrelink deems this amount as a deprived asset, which affects your pension entitlements over the next five years.
Investing in Financial Assets
Funds used to invest in financial assets like shares, term deposits, or additional properties are counted towards both the assets and income tests.
- Example: You invest $100,000 from your Reverse Mortgage in a term deposit. The principal is considered an asset, and the interest earned is treated as income, potentially reducing your pension benefits.
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Mitigating Negative Impacts
To mitigate the negative impacts on pension entitlements, consider the following strategies:
- Instead of taking a large lump sum, opt for smaller, structured withdrawals that may have a lesser impact on pension entitlements.
- Prioritise using the funds for exempt purposes like home renovations or significant medical expenses.
- Consult with a financial advisor or a Centrelink Financial Information Service (FIS) officer to understand the specific implications for your situation and explore strategies to optimise your financial outcomes.
Reverse Mortgages can provide valuable financial support in retirement, but their implications on pension entitlements require careful consideration.
By understanding the interactions with asset and income tests, planning the use of funds wisely, and seeking professional advice, retirees can make informed decisions that balance immediate financial needs with long-term pension entitlements.
Want to learn more about Reverse Mortgage? Download your FREE REVERSE MORTGAGE GUIDE.
Ready to Apply? You can now check your eligibility online or call Seniors First on 1300 745 745.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before you make any decision.