Pension Loan Scheme – what you need to know

The 2018 Federal budget produced little in the way of earth shattering announcements, but one item that has caught my attention is the proposed significant changes to the Pension Loan Scheme. So what is it and who might this proposed change help?

What is it?

The Pension Loan Scheme is a Reverse Mortgage. The Federal government will take a mortgage out over your home, and in return they will give you regular fortnightly income. That income will build up as a debt, and when the house is sold – typically either because you enter aged care or pass away – the debt is cleared from the sale proceeds of the property.

Who would it help?

Well, for a start you’d need to be a home owner to be able to use the Pension Loan Scheme. You also need to be of Age Pension age.

It’s ideal for someone who is asset rich but cash poor, and given the increases in property values that we’ve seen over the past decade, there are plenty of people in later life in that scenario. Often later in life people downsize their home, and in the process realise some cash to help fund their later years. But for those already in a house that isn’t too big, the Pension Loan Scheme might provide a way to not need to downsize for the financial benefits. You could stay put whilst still gaining access to the equity in your home.

What else is there to know?

The main thing is that at this point it is only a proposal and still needs to pass through parliament. Assuming that occurs with a minimum of fuss, the opening up of the Pension Loan Scheme isn’t scheduled to commence until 1 July 2019.

The end result of accessing the Pension Loan Scheme, or any reverse mortgage product, is that your estate is reduced, that is to say your beneficiaries will inherit less when you’re gone.

Once the legislation is passed we will no doubt learn further details, but at this moment in time (May 2018) we understand the following:

  • The maximum available per year would be approximately $35,000 for a single and $53,000 for a couple, though actual amounts will depend on the persons age and the value of their property.
  • Currently the interest rate is 5.25% and that hasn’t changed for about 20 years. I suspect that is because under the current rules no one uses the scheme. It may be reviewed following these changes.
  • The loan could be secured against an investment property or holiday house instead of your home.
  • The loan can be repaid at any time.
  • May not be available to those in retirement villages – would depend on whether the village allows mortgages to be taken over their properties.

 

Hopefully this summary is helpful. I’m sure there’ll be plenty more detail to come out on the Pension Loan Scheme once the legislation is passed, but it perhaps enables you to start making plans now, particularly if you were in the position of a reluctant downsizer.

Of course be in touch if you’d like some help and advice. Our contact details can be found here.