From 1 July 2019, retirees looking for new ways to boost their retirement income or pay for expenses like home care have another option open to them following some big changes to the federal government’s Pension Loans Scheme (PLS).
Although the PLS has been around for about 30 years, few retirees know about it and even fewer have used it due to some fairly restrictive eligibility rules. But all that changed from 1 July 2019, when new rules expanding its eligibility criteria and withdrawal amounts were introduced.
Under the new rules, many more people of Age Pension age can now apply to use this reverse mortgage style scheme to access extra income by borrowing against the equity they have in their home.
A reverse mortgage works a little like a home loan in reverse. It is loan that allows you to borrow money against the equity (or value of a property less any mortgage debt) you have in your home. Borrowers are required to pay interest on the loan, but regular repayments are not required and instead, are added to the loan amount. You can remain in your home until it is sold, usually on your death.
For more information about reverse mortgages, see SuperGuide article Reverse mortgages: What are they and how do they work?
Background to the PLS
The PLS was first established in 1985 when the Hawke Government re-introduced an assets test for the Age Pension and other pensions. Take-up of the scheme has always been limited, despite the Keating Government broadening eligibility in 1996.
According to a Productivity Commission report in 2010, there were only 710 loans in place at that time, mainly to part Age Pensioners.
In the May 2018 Federal Budget, the Turnbull Government decided to significantly broaden eligibility for the PLS by allowing full Age Pensioners and more self-funded retirees to participate in the scheme.
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From 1 July 2019, the PLS is available to all retirees of Age Pension age who meet the eligibility criteria.
Existing borrowers using the PLS may be eligible to increase the loan amount they receive each fortnight under the withdrawal rules applying from 1 July 2019. They will, however, be required to have adequate insurance covering the secured real estate and not be bankrupt, or subject to a personal insolvency agreement. To apply for an increased loan amount, contact the Department of Human Services.
How does the PLS work?
The PLS is a reverse mortgage style loan offered by the federal government allowing borrowers of Age Pension age to receive a fortnightly income stream by taking out a loan against the equity in their home.
Case study 1
Full rate single pensioner with $400,000 property
Janet is a 70-year-old single maximum rate age pensioner with a house valued at $400,000. Her Age Pension income is currently $908 per fortnight ($23,598 per year). Under the expanded PLS, Janet is now able to access some of the value in her home.
Janet chooses to receive an additional income stream of around $6,000 in the first year. Her income increases to $1,135 per fortnight ($29,497 per year), 125% of the maximum rate of the Age Pension. The value of the income stream increases over time in line with the indexation of the pension.
Janet continues to draw down a PLS income stream for 20 years at an interest rate of 4.5%. Janet passes away at age 90. Her family sell her house for $750,000.
The PLS loan owed to the government has increased to around $300,000, which is paid from the house sale proceeds. Around $450,000 remains in her estate. Over the 20 years, Janet receives around $170,000 in additional income to support her standard of living in retirement.
Source: Fact Sheet 3: Preparing financially for a longer and more secure life, Budget 2018, Treasury
Case study 2
Full rate pensioner couple with $850,000 property
Bob and Sue are a 70-year-old maximum rate pensioner couple, with a house valued at $850,000. Their combined Age Pension income is currently $1,368.20 per fortnight ($35,573 per year).
Under the expanded PLS, Bob and Sue are now able to access some of the value in their home. They choose to receive $2,052 per fortnight ($53,360 per year), the full amount of 150% of the maximum rate of the Age Pension. The value of the income stream increases over time in line with pension indexation.
Over the next 20 years, Bob and Sue receive a PLS income stream at an interest rate of 4.5%. After 20 years, Bob and Sue sell the house for $1.6 million. While the balance of the PLS loan owed to the government has grown to around $900,000, Bob and Sue pay out this balance from the sale proceeds and retain $700,000.
Over the 20 years, Bob and Sue receive around $500,000 in additional income to support their standard of living in retirement.
Source: Fact Sheet 3: Preparing financially for a longer and more secure life, Budget 2018, Treasury
Note: The original interest rates quoted in these case studies were 5.25% (the PLS interest rate at the time of publication. They have been updated to 4.5% to reflect the PLS interest rate from 1 January 2020.
10 key facts about the new PLS
Here are 10 important points you need to know about how the Pension Loans Scheme (PLS) operates from 1 July 2019:
1. You must be eligible
Under the new rules, all Australians who reach Age Pension age are able to access a PLS loan if they meet the eligibility criteria. (Previously, full Age Pensioners, most self-funded retirees and many part Age Pension were excluded from applying.)
You can apply if you or your partner are of Age Pension age and meet the Age Pension residence rules (live in Australia and be an Australian citizen, permanent resident and/or special category visa holder for at least 10 years including five years of continuous residence).
In addition, you must be receiving – or qualify to get – an eligible pension (including those who are a maximum rate pension recipients). You are still eligible for the PLS even if you have a payment rate of $0 for either the income or assets test.
Eligible pensions include:
- Age Pension
- Bereavement Allowance
- Carer Payment
- Disability Support Pension
- Widow B Pension
- Wife pension.
Note: To qualify for a loan under the PLS, you must not be bankrupt or subject to a personal insolvency agreement.
2. Income stream amounts are limited
Under the expanded PLS, from 1 July 2019 borrowers are eligible to receive higher fortnightly payment amounts. The maximum fortnightly loan payment amount increased to 150% of your relevant pension entitlement (including supplements). This means:
- Full Age Pensioners can borrow up to 50% of the maximum rate of the fortnightly Age Pension (including supplements).
- Part Age Pensioners can withdraw fortnightly payments up to a maximum of 150% of the full Age Pension less the amount of their current fortnightly Age Pension payments.
- Self-funded retirees can borrow up to 150% of the fortnightly full Age Pension.
PLS borrowers can choose any payment amount up to the 150% full Age Pension threshold.
3. No lump sums
Income from a PLS loan is received as a regular income stream and you can choose the amount of the fortnightly payment, up to 150% of a full Age Pension.
Unlike normal, commercial reverse mortgages, lump sums are not available under the PLS. For more information about reverse mortgages, see SuperGuide article Reverse mortgages: What are they and how do they work?
4. Loans are from the government
The PLS is administered by the Department of Human Services and eligible retirees receive the loan payments from the federal government.
The amounts received from a PLS loan are non-taxable.
Having an existing mortgage on the real estate you wish to use as security for a PLS loan does not automatically make you ineligible for the scheme, but most commercial mortgage contracts ban an additional charge being placed on the property.
An existing mortgage will also affect the value of the property when the maximum loan amount is calculated by Centrelink.
5. Age-based limits apply
The amount you can borrow under the PLS is limited so you do not end up owing more than your home is worth. Your maximum loan amount is limited by:
- your age, and for couples, the age of the younger spouse or partner at the time the loan is granted
- how long you intend to receive payments
- whether you are single or partnered
- the value of your home
- how much equity you have in the property and any amount of equity you wish to exclude from the loan.
The maximum loan amount is calculated using the formula:
Age component amount multiplied by value of real estate* divided by $10,000
Example: A 70 year old single person offers a property valued at $180,000 as security for the loan but wishes to retain equity of $80,000. The maximum loan is calculated as follows:
$3,080 multiplied by ($180,000 minus $80,000, divided by $10,000) = $30,800
*The age component amount is defined in the Social Security Act, Subsection 1135A(3). The value of the real estate is rounded down to the nearest multiple of $10,000.
6. Real estate is needed as security
To qualify for a PLS loan, you must have equity in a property you can use as security for the loan. The property can be your own home, an investment property or farmland and it must be located in Australia.
You also require adequate insurance cover to protect the real estate asset you are using to secure your PLS loan.
7. Low interest rates
At present there is a lower interest rate (4.5% pa compound) for PLS loans than for comparable reverse mortgages. The interest rate for PLS loans was lowered from 5.25% per year from 1 January 2020.
Interest is added to the outstanding loan balance fortnightly until the loan is fully repaid, which normally occurs when the property is sold, or from the borrower’s estate.
8. Repayable at any time
PLS loan debts can be repaid in full or part at any time, however, they are generally repaid when the home used as security is sold, usually as part of the winding up of your estate.
9. No Age Pension impact
PLS payments are not counted towards the Age Pension income test. The only exception is if you save your PLS payments rather than spend them, which could result in the saved amount being means tested.
Although normal reverse mortgages can affect the amount of Age Pension you receive because an income stream is assessed under the income test, PLS payments are not counted.
10. No fees
There are no establishment fees or monthly account fees with the PLS, which compares with around $1,000 for a normal home loan mortgage. Centrelink may, however, charge costs (including legal fees). The Centrelink costs are determined after the loan application is made and can be paid immediately, or added to the outstanding loan balance.
Setting up a PLS loan will require valuation of the property by a licensed valuer, but there will be no cost to applicants for this valuation.
If you are interested in the PLS, it’s probably worth taking a look at the Department of Human Services online information about the scheme. Check out the rules here.
The PLS (or any form of reverse mortgage) is a complex financial borrowing arrangement that can eat away at the amount of equity you have in your home and the amount you are able to leave to your beneficiaries.
It’s important to seek independent financial or legal advice from a qualified professional before making any decisions about the PLS.
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