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It’s a truth universally acknowledged that a retiree with a home but little in the way of super or other assets could do with some extra income.
Around 80% of Australian retirees own their home, with a median value of about $800,000. That’s more than four times the median super balance at retirement of less than $200,000; enough to last 15 to 20 years but not the 25-plus years many of today’s retirees can expect to live.
While the Age Pension is a safety net, it doesn’t stretch far. Finding extra cash for unexpected medical costs, aged care, mortgage debt or a desire to help the kids may be out of reach for many.
So it’s not surprising that there’s growing interest by the government and the private sector in finding ways to help retirees unlock the wealth in their home.
Changes to the Home Equity Access Scheme (HEAS)
From 1 July 2022 HEAS (previously called the Pension Loans Scheme) has been enhanced to allow lump sum payments as well as regular fortnightly income. It has also added a no negative equity guarantee (NNEG) to ensure the borrower, or their family, can never owe more than the market value of their property when it’s sold.
The private reverse mortgage sector is also expanding, with new products and new entrants into the market tapping into different areas of need.
So how are retirees using HEAS and reverse mortgages more generally, and what are the trends?
How to get the most from HEAS
Despite relatively high levels of home ownership among Australian retirees, take-up of HEAS is still relatively low.
A recent study by the ARC Centre of Excellence in Population Ageing Research (CEPAR) at UNSW looked at who is using HEAS and how. It found around 5,400 Australian retirees were receiving HEAS payments in December 2021. Of that number, 3,900 (72%) were receiving a full Age Pension and the rest were mostly part Age Pensioners (self-funded retirees can access HEAS, but few do so).
The study also found 91% of HEAS users opt to receive the maximum amount they are eligible for. To find out if this is the best use of the scheme, the study modelled four different strategies using 20 different household types, including couples and singles aged 67 who are eligible for the Age Pension and HEAS, with and without children, with income from housing, super and other assets, and five different wealth levels.
The strategies were:
- ASFA standard – use HEAS so combined income from super, other assets, the Age Pension and HEAS reaches the Association of Superannuation Funds of Australia (ASFA) comfortable lifestyle budget for the household type
- 70% replacement – use HEAS so the combined income from super, other assets, the Age Pension and HEAS reaches a 70% pre-retirement income replacement rate
- Maximum payment – receiving the maximum amount from HEAS annually
- Lump sums + ASFA – use lump-sum payments to cover aged care expenditures plus fortnightly payments to support an ASFA comfortable lifestyle.
One of the study’s authors, Dr Katja Hanewald, director of research at the Ageing Asia Research Hub, said results were measured not just on financial outcomes but the value people place on having extra cash now rather than in future, living in their own home and giving to their children.
The study found most households are better off receiving the maximum payments. The ASFA standard strategy provided the highest gains for lower income households and women while the 70% replacement strategy benefitted wealthier households.
The following case studies illustrate some of the ways retirees are using HEAS.
NB: all rates and data as at 20 March 2022
Access to lump sum payments
While commercial reverse mortgage providers have long offered lump sums as well as regular income payments, HEAS borrowers have only been able to receive lump sum advances since 1 July 2022. The maximum advance (which may be taken in one or two bites) will be capped at 50% of the maximum annual rate of Age Pension. Currently that is up to $19,354 for couples and $12,838 for singles.
Pension Boost is a private company helping retirees access HEAS for a fee. Pension Boost founder and CEO, Paul Rogan says it’s a broad church in terms of what people will use the lump sum for – from maintaining the home or repairing the car to repaying credit cards, large bills, health and aged care costs. “(These are) costs that the current regular fortnightly payment structure just doesn’t deal with.
“It’s a modest lump sum advance compared to the general minimum commercial reverse mortgage of $40-$50,000,” he says.
While the modest sums available via HEAS attract Age Pensioners on lower incomes, self-funded retirees may be more attracted to the flexibility and larger potential payments offered by commercial reverse mortgages.
Growing demand for reverse mortgages
Commercial reverse mortgages in Australia come in various forms and names including home equity release and home reversion. Since a regulatory shake-up in 2012, consumer protections have been enhanced, including no negative equity guarantees.
As cost-of-living pressures squeeze retiree budgets, demand for alternative sources of income is likely to increase.
Founder and CEO of reverse mortgage provider, Josh Funder expects consumer need and awareness to drive rapid growth in demand for equity release products in the coming year. He says customers are borrowing for a variety of reasons, including:
- Topping-up income with regular monthly drawdowns
- Refinancing of an existing mortgage or debt
- Bank of Mum and Dad giving money to the kids or grandkids for a home deposit, mortgage costs or education
- Medical and aged care expenses.
In practice, customers may use a reverse mortgage for one or several of these reasons rather than deplete their super.
As baby boomers progress through retirement, funding aged care will become a priority for many. Dr Hanewald says a reverse mortgage could be a good solution where one member of a couple goes into residential aged care while the other remains at home, so selling the home to pay an accommodation deposit is not an option. A reverse mortgage may also be used to pay for home care services, to modify the home to make it easier to live in, or to pay someone to do the gardening.
In response to retirees’ different financial and personal circumstances, new reverse mortgage lenders are entering the market to target specific financial needs, increasing competition in the sector.
For example, 2Be is targeting people aged 55 to 75 who want to use the equity in their home to help their children and grandchildren, while fintech start-up Boomer Home Loans plans to offer a reverse mortgage designed to help the over 55s refinance to clear their mortgage before retirement. This age group traditionally finds it difficult to secure bank finance.