One of the interesting things coming out of the Budget was the extension to the Pension Loan Scheme (PLS).
Fortunately, my clients have significant superannuation and private savings and do not require or have the inclination to utilise the new pension loan scheme which would involve them accessing the equity in their home to increase their income.
However, for a lot of retirees the balance in the superannuation or private savings may not be large and most of their wealth is tied up in the family home.
At this point the Government will typically provide a means tested age pension.
Since the last budget the Government is now offering, through the Department of Human Services, the Pension Loans Scheme allowing age pensioners and self-funded retirees to unlock the equity in their home to provide additional income.
Under the PLS scheme aged pensioners and self-funded retirees can potentially increase their income by 150% of the Age pension depending on their circumstances.
- Full rate pensioners can borrow up to 50% of the maximum rate of the fortnightly Age Pension
- Part pensioners can increase their fortnightly payment by whatever amount increases their pension plus loan payment up to a maximum of 150%of the maximum rate of fortnightly Age Pension
- Self-funded retirees can borrow up to the full 150% of the maximum rate of fortnightly Age Pension.
Another interesting element of the PLS is it establishes the Government as a lender or bank. The current interest rate for the PLS is 5.25% compound on the outstanding loan balance which is well above current commercial home loan rates.
It will be interesting to see how many pensioners choose to participate in the PLS. Given that, for many years the Banks have offered reverse mortgages enabling retirees to draw against the equity of their home. Reverse mortgages aren’t particularly popular. Retirees can draw a lump sum or receive regular payments. Again, interest is higher than standard commercial home loan rates at about 6.3% but the loan does not have to be repaid until you sell the home or the last surviving borrower passes away. Negative equity protection is built into the loan so you don’t end up owing the lender more than your home was worth.
It is likely reverse mortgages were not popular due to the interest rates being higher than a normal home loan and retirees being reluctant to return or increase debt when they had been working hard for a long time to reduce or pay off their mortgage.
The popularity and financial impact of the Pension Loan Scheme will be interesting to observe over time.
Contact arcinvest if you are wanting to understand more financially sound retirement options.