I was thinking of taking out a reverse mortgage to access $50,000 (as a lump sum) of equity I have in my home, which is worth $550,000 because I want to buy a new car and treat my family to a holiday. I have heard that doing this can affect my pension, is this correct? I wish to retire at the end of 2018 and am currently 61years old.
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Thanks for the question. A reverse mortgage is a complex type of home loan that allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
Interest is charged like any other loan, except you don't have to make repayments while you live in your home - the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.
You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.
Recently Canstar researched 10 reverse mortgage products on offer from 7 lenders in Australia. They found that the average interest rate was 6.60% (compared to the average standard variable home loan rate of 5.58%), and that based on a $90,000 loan amount the total repayments were over $176,000 with $90,000 in principal repayments, $70,000 in interest and over $15,000 in fees for a 10-year loan.
The 7 reverse mortgage product providers were Bank of Melbourne, Bank SA, BankWest, CBA, Heartland Seniors Finance, P&N Bank and St. George. They have very different products for example with CBA you must be 65 years old whereas with Heartland Seniors Finance you must be over 60. Factor in this with different fees and charges plus interest rates and it can be quite confusing.
With regards to your Age Pension query reverse mortgage payments received by the borrower in a lump sum are not assessed under the Age Pension assets test unless you use them to buy an asset such as a new car, which by the time you are of age pension age should have depreciated in value somewhat. If the lump sum is used for non-assessable reasons, such as home modifications or a holiday, it does not affect your future age pension benefits.
There could be alternatives to this such as accessing your superannuation via a transition to retirement strategy, or checking if you have a redraw on your existing home, or even talking to your bank about which loan would be best for you.
There is also going to be a gap between when you retire and when you are eligible for age pension. If you were born before 30 June 1955 your age pension age would be 66 years old, if you were born after 1 July 1955 your age pension age is 66.5 years old. So if you retire in 2 years’ time when you are 63 you will need to wait another 3-3.5 years before age pension would come into play.
I hope this helps.
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