Releasing your home’s value can lead to a more comfortable retirement. However, consideration must be given to each solution, such as reverse mortgages, government schemes, home reversion, and downsizing. Personalised financial advice is essential to uncover the best option for your unique circumstances.
Rising property prices have led to many retirees exploring ways to unlock the increased equity in their homes, enabling a more comfortable lifestyle during their golden years. For most of us, our homes represent the largest or most significant portion of our wealth. However, converting this asset into cash isn’t always straightforward. Selling your home can take time, and you will still need to find somewhere to live. Additionally, if you’re selling in a rising market, you’re also buying in a rising market.
There are several methods to access the equity in your home, however it’s essential to understand the implications for your specific circumstances. Here are some ways to unlock the value in your home:
Reverse mortgages
Reverse mortgages have gained popularity because they allow you to borrow money using the equity in your home as security. Following stricter regulatory requirements, reverse mortgages are now offered by various small bank and non-bank lenders.
How it works
The maximum amount you can borrow depends on your age. At age 60, you can typically borrow around 15-20% of your home’s value. This percentage usually increases with age, so by age 65, you may be able to borrow about 20-25% of the property’s value[i].
One key advantage of a reverse mortgage is that while you’re living in your home, you don’t have to make any loan repayments. The loan, including interest and fees, is repaid when you move out or sell your home. However, it’s important to note that interest rates for reverse mortgages are generally higher than standard mortgages, with an ASIC review of reverse mortgage lending finding that interest rates were typically 2% higher[ii]. This means, at the time of writing this blog, reverse mortgage interest rates are averaging just over 8% to just under 10%[iii].
To assist you in making an informed decision, the MoneySmart website offers a reverse mortgage calculator.
Government scheme
The Federal Government’s Home Equity Access Scheme serves as a popular alternative to private reverse mortgage products, experiencing growth of about 60% annually[iv]. This scheme provides loans to Australians who are of Age Pension age or older, secured against their homes[v]. You can choose to receive either a lump sum or fortnightly tax-free payments.
How it works
While the loan and associated costs must eventually be repaid to the government, you have the flexibility to make repayments or pause them at any time. If you sell the property, you can repay the loan upon settlement or transfer it to another property. Should there be an outstanding loan after your death, the government will seek repayment from your estate.
The no negative equity guarantee on a Home Equity Access Scheme loan ensures you or your estate won’t repay more than the property’s market value, minus other mortgages or encumbrances[vi]. This guarantee may not apply if you increase a mortgage, misrepresent circumstances, or commit fraud.
If you receive a pension, your combined loan and pension payments each fortnight cannot exceed 150% of your maximum pension rate. If your pension amount changes, your loan payments will be adjusted to ensure the total remains within this limit. If you do not receive a pension, you can still obtain a loan under the Home Equity Access Scheme, with fortnightly loan payments up to 150% of the maximum rate of your qualifying pension, which will be the Age Pension if you are of Age Pension age or older[vii].
The current interest rate for the scheme is 3.95% per annum[viii].
Home reversion
Home reversion is another method of accessing the equity in your home while continuing to live in it. Unlike a reverse mortgage, home reversion does not involve a loan, so there’s no interest to pay. However, there are transaction fees associated with this option.
How it works
In a home reversion arrangement, the provider pays you a discounted amount for a percentage of the property based on its current value[ix]. When the property is eventually sold, the provider receives the same percentage of the sale price. This means that as your home’s value increases, so does the amount the provider receives.
Other options
Downsizing
Another way to leverage the equity in your home is by selling it and purchasing a smaller one. Downsizing can enable you to clear any remaining mortgage and invest or spend any surplus funds.
Individuals aged 55 or older can contribute up to $300,000 (for each spouse) from the sale proceeds into their superannuation fund. This contribution is considered non-concessional and does not count towards the contribution cap[x].
Dual occupancy and subdivision
If your property allows, you might consider converting your home to a dual occupancy or subdividing your land. These strategies can generate additional income or provide other financial benefits.
Personalised home equity solutions
Deciding how to release the value in your home requires careful consideration and expert advice. Each option has its pros and cons, and what works best for one person may not be suitable for another.
It is important to work with a financial adviser who can help you navigate these choices and find the solution that aligns with your financial goals and personal circumstances. By doing so, you can enjoy your retirement years with confidence and peace of mind.
If you would like more information on home equity solutions, or further assistance with strategies for retirement, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[i] MoneySmart (2024) Reverse mortgage and home equity release
[ii] ASIC (2018) ASIC publishes a review of reverse mortgage lending
[iii] Finder (2024) Compare reverse mortgages in Australia
[iv] Seniors First (2023) Government Reverse Mortgage Scheme grows by 61% in 2023
[v] Services Australia (2024) Who can get it
[vi] Services Australia (2024) Repay your loan
[vii] Services Australia (2024) How much you can get
[viii] Services Australia (2024) Home Equity Access Scheme
[ix] MoneySmart (2024) Reverse mortgage and home equity release
