Downsizing your home
By the time you are considering retirement, it is likely that you will have substantial equity in your home. You may even own your house outright. Selling the family home is one way to free up cash for retirement. The money you receive can be invested in shares, term deposits, managed funds or superannuation.
In addition to finding a place to live, there are many financial, practical and emotional factors to consider before putting up the ‘For Sale’ sign.
Your age pension depends on what your assets are worth (the assets test). Selling your home may have an impact on the amount of social security benefits you receive.
Your home and the 2 hectares surrounding it are not counted in the assets test. If you sell your home, the proceeds will be exempt for up to 12 months, as long as you are planning to use the money to buy another home. However, the interest you earn on the proceeds in the meantime will be counted under the income test.
If you sell your home and buy a cheaper one, the surplus cash will be counted in the assets test. It’s best to speak to a Department of Human Services Financial Information Service (FIS) officer for more information.
Case study: Lee Lin sells the family home
Lee Lin is 67 and divorced. She decided to sell the family home after her children moved out because it was too big. She expected to sell her old home for $600,000, buy a cheaper apartment for $400,000 and have $200,000 left to invest.
Before she put her house on the market, she went to Centrelink and asked how the sale would affect her age pension. The FIS officer told her that the $200,000 would be counted towards the assets test for her age pension. Lee decided she was still better off downsizing, even though it would reduce her pension slightly.
Alternatives to selling
Selling the home where your children were raised and leaving behind neighbours and friends can be difficult and stressful. Add to that the challenges of relocating to a new area, moving into a smaller space and making new friends. Suddenly, staying put might seem like a good idea.
Here are some alternatives to selling your home:
- Think about converting your home to dual occupancy so you can live in one half and rent or sell the other half
- Rent out some rooms (this has tax implications and may affect your age pension so seek financial advice before you proceed)
- Consider a reverse mortgage (see below) if you need extra cash and have solid equity in your home
If you intend to stay in your house for the long term, you should consider renovating your home to ensure it is safe and easier to move around as you get older. My aged care website has information on getting help to stay in your own home so you can maintain your independence for longer.
How reverse mortgages work
A reverse mortgage allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
While no income is required to qualify, credit providers are required by law to lend you money responsibly so not everyone will be able to obtain this type of loan.
Interest is charged like any other loan, except you don’t have to make repayments while you live in your home – the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.
You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.
The risks
- Interest rates are generally higher than average home loans
- The debt can rise quickly as the interest compounds over the term of the loan – this is the effect of compound interest and is something you need to be aware of before making any decisions
- The loan may affect your pension eligibility
- You may not have enough money left for aged care or other future needs
- If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances)
- If you fix your interest rate then the costs to break your agreement can be very high
How much can you borrow?
The older you are, the more you can borrow. Different lenders may have different policies about how much they will let you borrow.
As a general guide, if you are 60 the maximum amount you can borrow is likely to be 15-20% of the value of your home. You can usually add 1% for each year older than 60. That means if you are 70, the maximum amount you could borrow would be about 25-30%.
The minimum amount you can borrow may depend on the provider. It could be as low as $10,000. Keep in mind that if you borrow the maximum amount now, you may not have access to any more money later.
How much will it cost?
The cost of the loan depends on the interest rate and fees. The main issue is that as the interest compounds, the debt will grow rapidly.
Some reverse mortgage products also allow you to protect a portion of the value of the property. For example, you might want to ensure that you have $200,000 left in case you need a bond for an aged care hostel. Use our reverse mortgage calculator to explore your options.
If you are borrowing money from a lender other than an Authorised Deposit-taking Institution such as a bank, building society or credit union, by law they must not charge more than 48% interest including all fees and charges.
Do your own research
Be proactive and do some homework before you sign up.
What is the impact on your social security?
Talk to the Department of Human Services’ Financial Information Service to check how a reverse mortgage would affect your pension entitlements.
Think about your future and what costs there might be
You may not want to think too far into the future or about how your health and living situation might change 10, 20 or even 30 years from now. But it is important that you start planning now for the extra costs you could incur like medical expenses and aged care, so that you will have enough money left to cover them.
Check SEQUAL membership
Some reverse mortgage providers are members of SEQUAL (an industry association). All their members agree to minimum standards (such as no negative equity guarantee).
How should you take the loan?
You can take the loan as a lump sum, regular income stream, line of credit or a combination of these options. Regular income stream payments may be less costly than a lump sum. Use our reverse mortgage calculator to work out the most cost-effective options.
Get independent legal advice
Ask your legal adviser to explain the fine print of the reverse mortgage contract so you understand the consequences of breaching any terms and conditions.
A reverse mortgage can be useful to relieve financial pressure or improve your lifestyle. Be aware of the conditions of the loan and the choices available. Use a licensed mortgage broker and seek financial advice before you commit to a reverse mortgage.
What to do next
After you’ve sold your house, you may have money to invest in other income-producing assets. There are lots of options available so seek financial advice on the best mix of investment products for your needs.
Selling the family home is not an easy or simple decision. Before you do anything, consult a financial adviser on the tax and social security implications, and speak to family and friends.
