Asset Rich but Cash Poor

Believe it or not for retirees the family home can be a source of income without the need downsize or rent out a room on Air bnb. Your home can be a secret little gold mine if you know where to dig.

According to a 2018 ASIC report Older Australians hold a combined half a trillion dollars of value in their homes. Yet most people leave its value untapped.

The Pension Loan Scheme (PLS) is a form of reverse mortgage offered by the Department of Human Services that allows eligible retirees to access the equity in their home (or equity in other Australian real estate) as regular income payments. This can help to provide additional cashflow to meet living expenses or other needs.

The current interest rate on the PLS is 4.50% per annum. Repayments are not required during the term of the loan and interest is added to the loan fortnightly and compounds.

The scheme was made even more attractive in this year’s Federal Budget. A ‘no negative equity guarantee’ eliminates the risk that borrowers may end up repaying more than the market value of their property.

The PLS is available to self-funded retirees, part-pensioners and full pensioners, who meet the eligibility requirements.

Eligibility for the PLS

To qualify for the PLS, a person must:

• Be of age pension age or be the partner of someone who is, AND
• Receive or qualify for:
  • age pension
  • disability support pension
  • wife pension
  • carer payment AND
• Own real estate in Australia which can be offered as security for the loan, AND
• Have insurance for the secured asset AND
• Not be bankrupt or subject to a personal insolvency agreement.

Limits on borrowing from the PLS

Payments from the PLS are paid as a fortnightly income stream – lump sums cannot be taken YET, there is the possibility of lump sums being available from 1 July 2022 .  Eligible retirees can borrow up to 150% of the maximum applicable age pension (less pension payments received).

Each year the value of the outstanding loan is assessed against the remaining equity in the home to determine if further borrowing will be approved for the year.

The maximum allowable loan value is calculated as an age-based factor (using age last birthday) multiplied by the value of real estate assets divided by $10,000. Age-based factors are available in the Social Security Act 1991 – Section 1135A.

Example

Phil is a single age pensioner. He receives the maximum fortnightly age pension of $967.50. He is eligible for the PLS. He can borrow $483.75 per fortnight which is calculated as:

(150% x maximum age pension) – pension payments

= (150% x $967.50) – $967.50

= $483.75

Phil will receive a fortnightly amount of $1,451.25 made up of $967.50 (his age pension) plus $483.75 (his borrowings).

Termination of the PLS

A client can stop receiving payments from the PLS at any time. The debt can be repaid either immediately or will be repayable from the client’s estate upon death. It is important to remember that interest will continue to accrue and compound until the loan is repaid.

Termination may also occur if the person reaches their maximum loan.

Repayment of the loan

Repayment of the loan occurs when:

• The client chooses to repay it (either in instalments or as a lump sum).
• The real estate securing the debt is sold unless the client offers another property of sufficient value as security
• The client dies, with the debt recovered from the estate. However, if the client was a member of a couple, if the surviving partner qualifies in their own right for the PLS they can choose to continue the debt. If the survivor does not qualify the debt will need to be repaid at the end of the 13-week bereavement period.

More information on the Pension Loan Scheme Can be found here - https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme

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