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Cost-of-living pressures and inflation are making life difficult for everyone and retirees are not immune.
The ASFA Retirement Standard September quarter 2023 figures show couples aged around 65 need to spend a record high of $71,124 per year to live a ‘comfortable’ retirement.
The annual increase in expenditure needed by singles rose 5.5% to $50,981 during the September quarter.
With their budgets under sustained pressure for the past two years and significant relief unlikely any time soon, retirees may need to look for new ways to boost their retirement income. One solution could be the federal government’s Home Equity Access Scheme.
What is the Home Equity Access Scheme?
The HEAS is a reverse-mortgage-style loan offered by the federal government that allows borrowers of Age Pension age to receive a tax-free fortnightly income stream by taking out a loan against the equity in their home.
Since 1 July 2022, borrowers are also able to withdraw lump sum advances.
How does the Home Equity Access Scheme work?
The HEAS can be a useful way to supplement your retirement income using the equity you have built up in your home. It allows you to receive a non-taxable fortnightly payment from Services Australia or the Department of Veterans’ Affairs (DVA) from a loan against your home.
Since 1 July 2022, you are also able to get an advance payment (lump sum) from your loan in addition to, or instead of, your fortnightly loan payments (see Point 3 below).
From that date a No Negative Equity Guarantee applies to all existing and new HEAS loans. This means you or your estate are protected from owing more on your reverse mortgage than your home is worth. The new guarantee brings the HEAS into line with the rules governing private sector reverse mortgage loans.
10 key facts about the new Home Equity Access Scheme
Here are 10 important points you need to know about how the HEAS currently operates:
1. Who is eligible?
Under the HEAS rules, all Aussies who reach Age Pension age can apply for a HEAS loan if they meet all the following eligibility criteria:
- You or your partner are of Age Pension age and meet the Age Pension residency rules
- You must be receiving – or qualify for – a qualifying pension (including those who are maximum-rate pension recipients). You are still eligible for the HEAS even if you have a payment rate of $0 for either the income or assets test. Qualifying pensions include:
- Age Pension
- Carer Payment
- Disability Support Pension
- You or your partner must provide Australian real estate as security for the loan (see Point 6)
- You must have adequate and appropriate insurance covering the property you are providing as security
- You must not be bankrupt or subject to a personal insolvency agreement
2. Payments are a nominated amount
You are allowed to nominate your own fortnightly loan payment amount, up to 150% of the maximum fortnightly payment rate for your eligible pension (including supplements). This means:
- Full-rate age (or other qualifying) pensioners can borrow up to 50% of the maximum payment rate for the fortnightly full-rate pension (including supplements).
- Part-rate age (or other qualifying) pensioners can withdraw fortnightly payments of up to a maximum of 150% of the full-rate Age Pension less the amount of their current fortnightly pension payments (including supplements).
- Self-funded retirees can borrow up to 150% of the fortnightly full-rate Age Pension.
3. Lump sums are available
Until 30 June 2022, payments from a HEAS loan could only be taken in the form of a fortnightly income stream.
From 1 July 2022, lump sum payments are permitted under the HEAS. Participants in the scheme can now apply for up to two lump sum advances totalling up to their cap amount each year.
- Full-rate age pensioners participating in the HEAS can access lump sum advance payments equal to a total of 50% of the maximum annual rate of the full Age Pension. Based on current (September to March 2024) full-rate Age Pension rates, this is around $14,270 per year for singles, with couples combined able to receive around $21,494. This is on top of receiving your normal full-rate Age Pension payments.
- Part-rate age pensioners participating in the HEAS can access lump sum advance payments equal to a total of 50% of a full-rate Age Pension (as outlined above). This is on top of receiving your normal part-rate Age Pension payments.
- Self-funded retirees participating in the HEAS can access a lump sum advance payment equal to a total of 50% of the full-rate Age Pension. Based on current (September to March 2024) full-rate Age Pension rates, this is around $14,270 per year for singles, with couples combined able to receive around $21,494. This is on top of any other HEAS amounts you receive up to the maximum annual amount. If you don’t receive any Age Pension payments as a self-funded retiree, from 1 July 2022 you are eligible to bring forward one-third of your maximum HEAS payments as a lump sum.
4. Loans are from the government
The HEAS is administered by Services Australia and eligible retirees receive the loan payments from the federal government.
Payment amounts received from a HEAS loan are non-taxable.
5. Age-based limits apply
The amount you can borrow under the HEAS is limited to help ensure you don’t end up owing more than your home is worth. For added peace of mind, from 1 July 2022 the HEAS includes a No Negative Equity Guarantee.
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.
6. Real estate is needed as security
To qualify for a HEAS loan, you or your partner 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 but it must be located in Australia. The real estate can be owned by a company or trust, but either you or your partner must be an attributable stakeholder of the company or trust.
Property in a retirement village may be accepted as security if you or your partner’s name is on the freehold title of the property, you are not contractually prevented from selling the property, and you or your partner’s estate controls the distribution of the asset.
With a HEAS loan, you can choose how much of the value of your property you want to use as security for your loan.
7. Interest rates are low
The interest rate on HEAS loans is variable and changes over time, but currently (December 2023) there is a significantly lower interest rate (3.95% per year compound) for HEAS loans than for comparable reverse mortgages in the open market.
| Date of effect | Interest rate |
|---|---|
| 1 January 2022 onwards | 3.95% |
| 1 January 2020 to 31 December 2021 | 4.50% |
| 25 December 1997 to 31 December 2019 | 5.25% |
| 20 March 1997 to 24 December 1997 | 6.25% |
| 10 July 1996 to 19 March 1997 | 7.90% |
Source: Social Security Guide 10 August 2020, Australian Government.
The interest rate for a reverse mortgage like HEAS is generally higher than traditional mortgage rates to compensate the lender as – unlike normal mortgages where you make regular repayments through the life of the loan – a HEAS loan is not repaid until the home is sold, or you choose to repay it.
The outstanding loan balance is based on the amount of loan payments you received before the pay day plus accrued interest, less any repayments.
The interest for a HEAS loan is added to your outstanding loan balance each fortnight until the loan balance is fully repaid. This happens even after the maximum loan amount is reached and payments are stopped.
8. Repayable at any time
HEAS loan debts can be repaid in full or part at any time, however they are generally repaid when the home used as security for the loan is sold. For most HEAS participants this usually occurs after they die when their estate is wound up.
9. No Age Pension impact
Fortnightly HEAS payments are not counted towards the Age Pension income test. The only exception is if you deposit your HEAS payments into an account and retain them for an extended period rather than spending them. This could result in the saved amount being means tested as deemed income.
Although normal reverse mortgages can affect the amount of Age Pension you receive because an income stream is assessed under the income test, HEAS payments are not counted.
10. Few fees
There are no establishment or monthly account fees with a HEAS loan, which compares with around $1,000 for a normal home loan mortgage.
Even so, Services Australia or DVA may charge you some costs (primarily legal fees) when the loan commences and when it is discharged. These are mainly costs associated with registering and removing the charge or caveat the government will place on your property’s title deed.
Setting up a HEAS loan requires a valuation of your property by a licensed valuer, but you will not pay this cost.
The costs charged by Services Australia or DVA are determined after the loan application is made and can be paid immediately, but most people choose to add them to the loan balance.
How much can I borrow?
You can choose any amount for your HEAS loan up to the maximum loan amount (MLA), which is the total loan you can access under this scheme.
Your (or your partner’s) age AND how much equity you own in Australian real estate determine the size of your MLA.
Your MLA generally increases each year as you or your partner get older and the value of your property increases. If the value increases, your maximum loan amount also increases and, if it decreases, your maximum loan amount also decreases.
The fortnightly loan payments stop once your loan balance reaches your maximum loan amount. Interest continues to be added to the outstanding balance until the loan is repaid.
Under the HEAS rules, your property must be revalued annually, as the security amount for the loan is based on the current market value of your Australian property, excluding your mortgage and loans. This valuation can be the latest rates notice or an independent valuation.
If the property value decreases or increases, you are required to inform Services Australia, the same way benefit recipients are required to keep the department updated when receiving any other government benefit. HEAS recipients must notify Centrelink or the DVA within 14 days if there is any change in circumstances affecting the real asset being used to secure the loan.
How to calculate the maximum loan amount
The maximum loan amount is calculated using a formula:
Annual value of real estate* divided by $10,000 multiplied by the age component amount**
- *The value of your real estate security is rounded down to the nearest multiple of $10,000.
- **The age component amount is defined in the Social Security Act, Subsection 1135A(3).
Click the button below to see the age component amount for your current age.
Age component amount
| Current age | Age component amount |
|---|---|
| 55 or younger | $1,710 |
| 56 | $1,780 |
| 57 | $1,850 |
| 58 | $1,920 |
| 59 | $2,000 |
| 60 | $2,080 |
| 61 | $2,160 |
| 62 | $2,250 |
| 63 | $2,340 |
| 64 | $2,430 |
| 65 | $2,530 |
| 66 | $2,630 |
| 67 | $2,740 |
| 68 | $2,850 |
| 69 | $2,960 |
| 70 | $3,080 |
| 71 | $3,200 |
| 72 | $3,330 |
| 73 | $3,460 |
| 74 | $3,600 |
| 75 | $3,750 |
| 76 | $3,900 |
| 77 | $4,050 |
| 78 | $4,210 |
| 79 | $4,380 |
| 80 | $4,560 |
| 81 | $4,740 |
| 82 | $4,930 |
| 83 | $5,130 |
| 84 | $5,330 |
| 85 | $5,550 |
| 86 | $5,770 |
| 87 | $6,000 |
| 88 | $6,240 |
| 89 | $6,490 |
| 90 or older | $6,750 |
Source: Services Australia
Your MLA is recalculated each year using the same formula.
The value of your real asset is rounded down to the nearest multiple of $10,000. If the value of real assets is LESS than $10,000, the value is taken to be nil.
As noted in the Social Security Act 1991 Section 1135A, the MLA available to you is NOT a fixed amount that is set permanently. Your MLA is recalculated once every 12 months after your birthday (or, if applicable, the younger partner’s birthday).
Each year on your birthday, the age component amount available to you is increased in line with each $10,000 of real assets you own. This is necessary on equity grounds, as the maximum loan available to different people of the same age and in the same financial position should be the same regardless of how old they were when they commenced participation in HEAS.
The PLS is a good scheme if used wisely. A problem arises if you wish to make regular repayments to control the balance. In my case I have found a financial institution that issues fee free bank cheques (currently you can only repay by bank cheque or money order) but nowhere on Centrelink’s websites is there any information about who to make the cheque out to, where to send it, how long it will take to be credited or how to check the account balance.
Why is this? (Answer : follow the money!).