Learn How Equity Release Can Help
If you’ve been doing a little research into cashflow options for your retirement, you may have come across the term ‘equity release’. Equity release involves borrowing against the value (equity) stored in your home to obtain additional funds. Unlike a conventional loan, a loan through equity release may not require repayments during its life.
Equity release is often used when people are asset rich but have low liquidity. It may be used to renovate a home, fund a more comfortable style of living, pay for a child’s university fees or used as a deposit for their home.
What is Equity Release?
The concept of equity release allows homeowners who may no longer be earning income to borrow money using a portion of their home’s value. This can provide additional cashflow to homeowners, letting them finance their retirement lifestyle.
There are several different forms of equity release, including reverse mortgages and Government Pension Scheme Loans.
In Noel Whittaker’s book, Retirement Made Simple, he explains some of the reasons why reverse mortgages work in Australia.
“Reverse mortgages work where long-term home price increases are higher than the interest rates on the loan – this is generally the case in Australia,” he writes.
But this hasn’t always been the case.
Reverse mortgages had a bit of a negative connotation in the 90s, and it’s easy to see why. There were the high interest rates, and the chance of losing your home.
However, the days of unregulated reverse mortgages are now a thing of the past. In 2012, laws were passed to provide further protection for borrowers. This included instituting a “no negative equity” guarantee, responsible lending protections and guaranteed lifetime home occupancy.
“ASIC also put in place conservative loan-to-value limits that increase based on the age of the borrower,” Noel writes.
“For example, at 60 years of age, ASIC prescribes that a reverse mortgage should not be more than 20% of the value of the home. […] The conservative ASIC loan-to-value ratios mean that in most economic scenarios, a 65-year-old taking out a loan for the maximum available amount today will retain more than 50% home ownership by the age of 90”.
Reverse mortgages also provide an opportunity for debt consolidation. Noel writes that this allows for refinancing without a negative impact on income.
“More and more retirees are now retiring with an outstanding balance on their home loan or credit card, and a reverse mortgage can refinance this debt without depleting retirement income”.
While a reverse mortgage can be helpful for more flexibility of funds, it’s important to keep in mind that having a reverse mortgage reduces the capital of your property.
Pension Loans Scheme (PLS)
Offered by the Australian Government, the PLS provides an additional fortnightly payment for retirees. It is secured against a person’s property and accrues as a debt with a compounding interest rate. According to Noel Whittaker’s Retirement Made Simple, “the PLS allows a fortnightly loan of up to 150% of the maximum age pension, representing around $12,385 a year for singles and around $18,670 for couples, on top of receiving a full age pension”.
Some changes to PLS loans have occurred recently. For example, starting on 1 July 2022, a no-negative-equity guarantee will be introduced for the loans. On top of this, homeowners will also be able to receive an advance payment as either one or two lump sums.
Why Choose Equity Release?
Equity release may be an option if you find yourself retiring with a superannuation balance that won’t cover your lifestyle costs. Retired small business owner, Vivienne Cable found herself in a similar predicament upon her retirement.
“I found I was being very cautious,” she says. “I was terrified of having to take money out of super and having it dwindle. I didn’t want to have to think about where money was coming from for things, like what if I need to change the car or have to fix something in the apartment?”
After consulting with a financial advisor, Vivienne decided to take out a Household Loan from Household Capital.
Having the extra financial freedom took a lot of the stress away for her.
“I never knew I’d feel such relief when that [loan] money came through,” she says. “I can get the full pension, do some consulting work and use my Household Loan and it still doesn’t impact my pension … I’ve also had fans installed, repositioned some lights and re-carpeted and re-painted my apartment.
“But mostly it means that I can say ‘yes’ to a few more things, instead of ‘oh dear, wouldn’t it be nice …’. We work too hard during our lives to have to say ‘no’ all the time when we’re retired”.
Equity release could provide a solution for retirees who are asset rich but liquidity poor. However, before making the move to release equity from your home, it’s important to consult with a trusted financial advisor to find out whether it’s a suitable solution for your situation.