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In this video Tracey Spicer talks to Dr Sarah Sinclair from RMIT about home equity release products for retirees, such as reverse mortgages and the Pension Loans Scheme.
Australia has a high rate of home ownership, but many people still don’t have enough money in their Age Pension or superannuation for a comfortable retirement. To talk about the growing conversation around accessing equity in your home, we’re joined by Dr Sarah Sinclair from RMIT an applied economist with an interest in wellbeing and ageing, who’s co-authored a report on this topic. Hi, Sarah.
Dr Sarah Sinclair
Hi, Tracey. How are you? Thanks for having me to talk about this important topic today.
My pleasure. In simple terms, what is equity release?
Dr Sarah Sinclair
So as you mentioned, about 80% of Australians have home ownership and within the value of that home there are means that you can access that value. And when we talk about equity release, we’re talking about what kind of mechanisms are in place where you can access the value while still remaining in your home, retaining ownership of that home and being able to enjoy some of the benefits that that asset can give you to support retirement incomes.
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So there are a number of different mechanisms through which we do that. And I guess we’re most familiar with the downsizing component of accessing equity where we say ‘let’s sell the house and we’ll move into something smaller’. And in that way, you’ve sort of released that equity in that process.
But there are a number of financial products out there that can facilitate you to remain in whichever house you’re in, which often is the family home that you’ve been in for a long period. You’ve raised a family. You’re comfortable in that environment and comfortable in that community. And these equity release products can enable you to access some of the value of your home while staying in your home.
So reverse mortgages would be one. There are also a home reversion products, and there are new products coming to market at the moment, such as that by Domacom, which is a senior equity release product. So there’s a number of products that are out there in the market that facilitate your access to that equity.
Based upon your research for this report, is there enough information available for Australians about all of these options, including things like the Pension Loans Scheme?
Dr Sarah Sinclair
Yes. So as you mentioned, the Pension Loans Scheme is one of those alternatives that can be accessed to gain access to your equity in your home. In terms of information, it is complex and it’s very much linked to your own personal situation. So the type of product that you want to access in the market is going to very much depend on your own personal needs and wants. I must say that there is definitely a gap, an education gap. We know that older people are very competent and confident in managing their money. And is this is well known. But they’re not very comfortable with taking on debt and understanding those products.
ASIC recently identified, that these products can be really important in raising standards of living. But there’s very much an education gap and that they’re not well understood in the community. So I think there’s definitely room for improvement with access and education around these kind of financial products to see what’s available.
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The financial loan scheme has been quite almost difficult to find out about. I mean, there hasn’t been much promotion of it. In recent months that has changed. And obviously with the recent report from Treasury, where there’s been a little more in-depth modelling of the kind of benefits these products can bring, there’s been a little more traction around these products, a little bit more information getting in through media sources.
The MoneySmart website is a really good place to start. I think there is some good information there, but you have to seek it out. And I think that’s important. We want more financial planners who are engaging with people, making decisions around retirement or just some more general discussions around the existence of these types of models or products – that they’re out there, that they do provide value for people depending on the circumstances.
They have in the past been linked with some negative connotations. And I think that’s kind of being dealt with in a regulatory sense over the years and not so much even within the Australian context. But I think there needs to be a little bit more work around that in terms of dealing with, just educating, getting more information out there.
For those who do access their home equity, what kind of things are they spending the money on?
Dr Sarah Sinclair
That’s really interesting. So what we have seen and this relates to our recent report. What we’ve identified, we’re looking at over 15,000 different loans and what people have reported they have used those loans for, is that there has been a shift in recent years to using equity in their home to pay down debt so that people are entering with debt, and particularly mortgage debt as they enter retirement.
And that is indicative of the housing market more broadly and changes that we observed in recent years where people are later getting into the housing market, housing affordability issues that I think have been a major concern in recent years, and then disruptions over the life course. If there’s a relationship breakdown or divorce, I mean, that can always mean that there’s a re-establishment of a different household. And trying to get into the housing market again means that you’re more likely to be carrying debt through to closer to retirement.
So there’s a lot of kind of structural changes that mean that that debt is being carried through to retirement, which once you hit retirement and you’re and there’s a change in your income, obviously relaying that debt or paying down that debt has become more significant as a usage.
The other primary resource sorry, I was just going to go with the next use, which is home improvements, and this is something I’m kind of passionate about because I think we all need to be thinking about the type of housing that we want to live in as we age. Just from my personal perspective, I bought a house recently, and I wanted to make sure that I had a bedroom on the ground floor and a bathroom on the ground floor.
And a lot of this has to do with what I observed my parents go through when they became less capacitated as they age. So I think home improvement is often another category that people drawdown and spend that money on. It used to be the primary and now it’s reverted to a secondary after relaying the debt. So it’s not necessarily a big spend up on a holiday that people are using it for, but it is you know, it can serve as a very useful way to consolidate your debt and to move forward and manage your income.
The changes over the years are absolutely fascinating. Before I let you go, Sarah, just briefly, what kinds of problems are there with differences in regulation between the states when it comes to accessing home equity?
Dr Sarah Sinclair
OK, that’s an interesting one, because I think a lot of it comes down to the complexity in the policy between the different states. So, as I said, you’re dealing with different housing markets for a start, but you also have different regulatory or concessionary environments, for example, with stamp duty. So if you look at the variation in stamp duty between the ACT and Victoria, for example, I mean, for a $500,000 home you’re looking at $13,000 in ACT relative to $25,000 in Victoria. But then you’ve got all of these added complexities where there’s concessions in Victoria that there aren’t elsewhere.
So, you know, it becomes very difficult to compare like with like across the different states. And then we’ve got the broader federal policies coming in on top of that, which it adds to the complexity and again, links back to that education component that understanding the concessionary environment and understanding the engagement with the pension and the eligibility criteria for the pension, that there are things that that we need to make clear or to be able to understand.
And we do need to do that at a state level because because of the different policy settings. So that can just adds another layer of complexity that we need to deal with.
Dr Sarah Sinclair, thank you so much for breaking down this complex area for us all.
Dr Sarah Sinclair
Thank you. It was lovely to talk to you. Tracey.
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