How older Aussies can cash in on their home equity in retirement
Most retired renters in Australia live in poverty, whereas very few retired homeowners suffer the same fate, according to a key finding of the federal government's Retirement Income Review. Could there be a better argument for owning a fully paid-off family home in retirement?
The review found that housing is an important component of voluntary savings for most people and a major determinant of their retirement outcomes. "As homeowners generally have lower housing costs in retirement, they tend to have better retirement outcomes than those who rent. The home is also an asset that can be drawn on in retirement."
It also points out that the principal residence is excluded from the assets test for the age pension. "Regardless of the value of the house, a homeowner can receive the same age pension as a renter, all other things being equal," the review says.
There are several strategies - including downsizing, upsizing and taking out a reverse mortgage - that will help maximise the contribution your home can make to your retirement lifestyle. Which one you choose depends on your circumstances.
If your super balance is relatively low - the ASFA retirement standard estimates a single person needs an annual income of $44,224 for a comfortable lifestyle ($62,562 for a couple) and to achieve that you need a balance of $545,000 ($640,000 couple) - you could consider selling your home and buying a cheaper one. Under the downsizer contribution rules you can park up to $300,000 of the proceeds in super as long as you meet the eligibility requirements. These include having held the home for 10 years or more and being 65 or older.
And selling the family home is free of capital gains tax.
Or, rather than putting the funds into super, you can invest them yourself to reduce fees.
On the flipside, some retirees' situations are improved with lower super balances and a legitimate way to achieve this is either to move to a more expensive home or renovate your existing one. The current taper rate for the age pension creates a "sweet spot" for retirees to reduce their savings to receive either a full or part age pension, according to a submission by the Alliance for a Fairer Retirement System
to the Retirement Income Review.
"That sweet spot [for the full pension] is around $400,000 in savings, which sees a pensioner couple earning $1000 a month more than a couple with $800,000 in savings," says Ian Henschke, chief advocate for National Seniors Australia.
For retirees who want to stay put but need extra cash, there are a number of ways your home can provide this.
Pension Loan Scheme
The pension loan scheme (PLS) is a federal government initiative that allows you, if eligible, to borrow against your home through a reverse mortgage.
You can use the equity in your home to borrow up to $36,000 a year (single) or $54,000 (a couple). The loan, which is also available to self-funded retirees, is secured against your house as a reverse mortgage. The current interest rate is 4.5%.
Reverse mortgages enable you to access some of the capital in your home. They're available to those over 60 and the mortgage is limited to 15%-20% of your equity, with a minimum loan of $10,000.
You can take regular payments, a lump sum or both. It's only available in selected postcodes. Current interest rates vary from 4.95% to 5.6%.
Wealth Release, offered by Homesafe Solutions, aims to provide a debt-free cash boost for older Australians. Unlike a reverse mortgage, Homesafe buys a share of the future sale value of a house.
The homeowner retains the title deed. Homesafe calculates the payout based on the future share of the house to be sold, the homeowner's age and the house value today.
The payout can range from $25,000 to $1million. In return for a lump sum upfront, Homesafe receives an agreed percentage of the future sale proceeds of the house. There is no time limit on any sale.
Fractional senior equity release
Fractional senior equity release, which is offered by investment manager DomaCom, enables you to sell part of the equity in your home to an investor, via DomaCom, in return for a lump sum or staggered payments.
A 4.4% service fee is charged, which is split between the investor and the platform. As the homeowner you are essentially liquidating part of your house into cash.
The outside investor then owns the equity and receives yield from it through the service fee as well as a proportional share of any capital gains should the house be sold.
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