Retirees doing it tough
Many retirees are having increasing difficulty making ends meet as bills rise. One way out is to downsize to a cheaper home but agents’ fees coupled and stamp duty mean anybody doing this is almost certain to lose close to $50,000 of their precious capital.
Another option is to take out a reverse mortgage - is a loan where there may be no repayments of principal or interest. They are not particularly popular with older people because the debt is likely to double every nine years because of the effect of compound interest, but they can be a great tool in the right circumstances.
The beauty of them is they can enable seniors who are asset rich and cash poor to improve their quality of life while they are still young enough to enjoy it. A loan of just $50,000 could enable them to replace their ageing car, refit their kitchen with new appliances and even go on a decent holiday.
There is another option – a loan from Centrelink under their Pensions Loan Scheme where the interest rate is currently 5.25 %, considerably lower than the normal reverse mortgage rate
This enables people of pensionable age who cannot get a pension because of their income or assets (but not both), or those who are only receiving a part pension, to access part of the equity in their home.
Suppose a couple owned their own home, had a block of land worth $600,000, personal effects worth $40,000 and just $10,000 in the bank. Because of the level of their assets they are entitled to a combined aged pension of just $12,781.60 a year ($491.60 a fortnight).
Under the Pension Loans Scheme they could offer Centrelink a mortgage over one of their properties and receive payments of up to $15,288 a year ($588 a fortnight) which would give them the same level of “income” as a couple on the full aged pension. These loan payments are not subject to tax nor are they assessed under the Centrelink income test.
It’s not the perfect solution but the couple have at least given themselves some protection against rising costs. Of course, the loan will continually increase and will need to be paid back when the house is sold or from their estate after they die. As always there is no such thing as a free lunch, but it is better than starvation.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.