Q: I am a self-funded retiree, I own my home and have a modest income from super and other investments. I have been thinking about using a reverse mortgage to give me a bit more income. In understand changes to the Pension Loan Scheme, taking effect soon, will mean I am eligible to borrow under those provisions. Is that correct?
A: Changes to the Pension Loan Scheme, which gives retirees way of topping up their incomes, take effect on 1 July. More people will be able to take advantage of the scheme.
The old scheme allowed part-pensioners to top up the amount of Age Pension they receive to the maximum available pension.
The revised scheme allows eligible retirees to borrow regular income payments up to 150 per cent of the maximum pension entitlement (less the pension amounts they receive).
AMP technical strategy manager John Perri says this change opens the scheme up to full age pensioners and self-funded retirees.
Amounts borrowed under the scheme become a debt due to the Commonwealth and the debt must be secured by a charge against the borrower’s real property. Interest compounds until the debt is repaid.
Essentially, it is another form of reverse mortgage.
The interest rate is 5.25 per cent. Interest is added to the outstanding loan balance until it is repaid. The debt is usually recovered when the property is sold, or from the borrower’s estate once the person dies.
Establishment fees will not be charged but there may be legal fees. The scheme is administered by the Department of Human Services.
Borrowings will be advanced in the form of fortnightly income payments. These payments will not count as assessable income for determining age pension entitlements.
This means that the Pension Loan Scheme and commercial equity release products will be assessed under the same income test rules.
AMP’s modelling suggests that a single person will be able to use the scheme to borrow up to a maximum of $36,000 a year and a couple will be able to borrow up to $54,000.
Perri says: “The most important consideration is that a reverse mortgage will reduce the proceeds from the sale of the family home.
“The Pension Loan Scheme may become an important strategy for retirees who became asset rich with property price increase to stay in their home an generate extra income to pay for home care or residential care for a spouse,” says Louise Biti, a director of Aged Care Steps.