In addition to being Australian’s single biggest asset, the family home - the cornerstone to establishing financial independence – also offers retirees equity they can potentially tap into without having to sell. But with the interest rates now getting close to double, reverse mortgages facilities – which lets homeowners borrow against the equity in their house – have largely fallen out of favour.
However, the Federal Government’s often overlooked Home Equity Access Scheme (HEAS) currently presents some mouthwatering opportunities for retirees and prominent West Australian financial adviser Wayne Leggett, principal of Paramount Financial Solutions explained to Azzet what they are.
Asset: How can Australians quality for the Home Equity Access Scheme?
Wayne Leggett (WL): To quality, you must be of age pension age and hold equity in Australian equity in your own name. Importantly, you don’t need to be an age pension recipient, don’t need to own a property outright and can even use property that is not your primary place of residence.
Azzet: How are applications made and what sort of payments does the scheme offer?
WL: Applications are made via Services Australia and are calculated on the equity offered as security, an applicant's age and the benefits already being received. Applicants can receive a fortnightly payment of up to 150% of the age pension and can even request a lump sum.
Azzet: So how does the scheme actually work?
WL: Benefits paid become advances against a loan secured by a caveat over the property offered as security. Interest is charged at a generous – compared with current traditional lending rates – 3.95%, calculated on the daily loan balance and debited fortnightly.
Azzet: So when is the debt repaid?
WL: The good news is that while the debt can be paid any time, it does not become payable until the earlier of the death of the last owner or the sale of the security of the property.
Azzet: At face value, the relatively low interest rate of this scheme appears to offer a very attractive retirement income strategy, would you agree?
WL: Absolutely, especially given that the returns on a typical, balanced account based pension (ABP) were in the realm of 12% to 14% for the past 12 months. While we would expect returns to be closer to half that number in the longer term, this is significantly above the interest rate of a HEAS loan.
Rather than drawing more from your ABP than you are compelled to, it makes sense to leave those funds earning a potentially higher return and draw against property equity at 3.95% to fund your retirement lifestyle. In this way, your ABP balance is earning a higher return than the interest you’re paying for the HEAS loan.
Azzet: So when can you clear the HEAS loan balance?
WL: This loan can be repaid at time, and if you become uncomfortable about this arrangement it can be unwound by withdrawing a lump sum pension payment and clearing the HEAS loan balance.
Those worried about losing equity in their home should remember that with the low HEAS rates that currently applies to HEAS loans, their home would have to be declining in value for their equity to be shrinking. Given the current chronic undersupply of houses in Australia, that doesn’t look like being a problem anytime soon.
As with anything to do with finance, the devil is always in the detail, so it would be wise to exercise caution in proceeding without professional advice.