Equity does not pay the bills. But a higher value of equity accumulated across different assets while still in the workforce creates more options for income to support better lifestyles after exiting the workforce.
Given that a majority of Australians neglect to prioritise investing in their future, their sole ‘nest egg’ is employer-funded superannuation.
According to government statistics, the current average amount of superannuation for a couple by the time they want to put the cue in the rack at age 65 is approximately $650,000 (combined).
Clearly, that will fall well short of the mark for those who, even if they fully own their home, will need circa $100,000 per year to fund a reasonably comfortable retirement lifestyle for 20 to 25 years.
The biggest asset for most of Australia’s 4.6 million people aged 65+ is their home.
This cohort represent 21 percent of the nation’s total population. And they live in 2.4 million dwellings.
Converting real estate equity into income – via either a government Home Equity Access Scheme or privately-funded Reverse Mortgage – is a fast growing ‘grey tsunami’ that can enhance retirement lifestyles.
Of those households, 1,812,000 (or 75 percent of the cohort) are owned without a mortgage, 225,000 are owned with a mortgage and 365,000 people aged 65+ own nothing – they rent.
Limited assets and equity means limited options.
Think about it… Even if one’s home is debt free, it does not generate any income.
In fact, the combined annual cost for electricity, gas, water, telephones, insurance, council rates and basic home maintenance is circa $20,000 per year.
One option might be to sell the home, pocket all of the sale proceeds, and progressively use that cash to fund general living expenses and leisure activities.
But where does one then live?
Spending the next 20 to 25 years in a caravan or a granny flat in their children’s background is not many people’s definition of ‘living the dream’.
Possibly the most common form of converting hard-earned equity into a liquid income stream is empty nesters downsizing their home.
Selling an asset worth (say) $1+ million to either move into something smaller in their existing hometown or relocating to one of the many more affordable regional wonders, can release a much-needed extra cash reserve of $300,000+.
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They’ve been around for approximately 40-years.
A Reverse Mortgage is a financial instrument that enables owners of residential property assets to borrow money using their real estate as security, without any requirement to make any loan payments.
Loan interest charges are compounded until such time as the borrower either sells the property or dies. The loan is then repaid in full within 12-months of either trigger.
Pure income without any associated expenses or taxes is an extremely rare commodity.
Essentially, the intention is to covert (largely useless) dormant equity into either a lump sum cash payment or a regular income stream which will then fund a more enjoyable lifestyle.
If you don’t use it, you may as well lose it
Often influenced by a heavy sense of obligation to leave behind a big inheritance for others to enjoy, many retirees seem reluctant to dip into their capital.
So, they typically limit their revenue sources to ongoing returns on investments, such as share dividends, bank interest and net rental income.
Each to their own, but I find it peculiar why one would bust their butt for the first 60+ years of their life and then consciously tolerate a very modest lifestyle for the remaining 25-years when they don’t have to.
No one benefits from EQUITY until it is either tapped into to help purchase another asset (such as during the ‘acquisition stage’ of one’s life) or when the equity is converted into revenue.
Federal Treasury’s 2020 ‘Retirement Income Review’ flagged opportunity for retirees to enjoy significantly better lifestyles through financial instruments that support real estate equity release.
“Using relatively small portions of home equity through the Pension Loans Scheme or similar equity release products can substantially improve retirement incomes for many people.”
Real Benefits
The collective failure of Australians accumulating sufficient equity in assets means that only 31 percent of people currently aged 65+ are financially independent.
As a consequence, the annual cost for taxpayers to fund aged pensions to 2,583,000 people is now a staggering $70 billion. A further $15 billion of our taxes is spent to pay carers.
On its own, superannuation will not be enough to fund a quality lifestyle, nor should anyone expect it to.
As the superannuation access age continues to creep closer to 70, that money is of no use to those who want to exit the workforce before then.
Billy Norman from financial advisory firm, Link Wealth says “I think Reverse Mortgages can be appropriate in some circumstances, for retirees who aren’t concerned with what they leave behind, and who own a home but have very little in other assets to fund retirement.”
Like alcohol, processed foods and gambling, Reverse Mortgages should be used responsibly.
Getting comfortable with using a Reverse Mortgage requires a mindset switch away from accumulating assets and monitoring debt to giving oneself ‘emotional permission’ to drawing down on that hard-earned equity and enjoying what’s left of life.
Advantages of how it could be used include:
- Fortnightly credits from the funder directly into a nominated bank account, effectively mirroring a ‘regular salary’ to support general living expenses.
- Major capital expenditure items such as a replacement car or caravan.
- Home renovations (including modifications for mobility limitations).
- Major health expenses.
- Helping their adult children enter the property market (‘Bank of Mum-and-Dad’ has already contributed $30 billion into homeownership and is Australia’s 10th largest ‘bank).
- Contributing towards grandchildren’s education fees.
- Aged care expenses.
- General contingency fund.
- A viable option for some people who want to stop working before they reach the superannuation access age.
- A viable option for those who would prefer not to downsize the family home.
- A viable option for minimising the need to sell investment properties earlier than is absolutely required. 80-years of evidence confirms house values in most Australian cities (regional and capital) have tripled or more over each 20-year block. So, it’s not unreasonable to anticipate a $1 million asset at age 65 might end up increasing to $2 million at age 75 to 80.
Property investors with multiple properties have multiple revenue strings for their retirement bow.
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How it works
- Property owners must be a minimum age of 60.
- Residential properties only.
- Properties must be owned by natural persons (no companies or trusts).
- The financier registers a first mortgage over the property.
- A 60-year-old homeowner may be able to borrow 20 percent of the value of their home.
- As a guide, the LVR increases by 1 percent per year over 60. A 75-year old might be eligible to borrow up to 35 percent of the property value.
- There is no requirement to ever make any payments towards the loan, although the borrower can do so whenever they wish.
- Loan interest is compounded (added to the loan). The loan balance therefore escalates. Hence the requirement for conservative LVR settings.
- The property owner still benefits from capital growth.
- Loans can be applied for against investment properties, so long as they are residential and the normal LVR limitations are observed.
- The loan amount can be drawn down as a lump sum, in multiple instalments or a combination of both.
- Reverse mortgages are regulated loan products with a variety of safeguards to protect consumers, including preventing financiers from kicking borrowers out of their home, or forcing the sale of a property.
- Federal law also protects the property owner from becoming liable for negative equity (debt exceeding the asset value).
- The loan must be repaid in full within 12-months of all owners of the home becoming deceased, or when you sell or move out of the home (such as moving into an aged care facility).
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Who offers them?
While many Australians may never have heard of Reverse Mortgages, they have been around for a long time.
The federal government’s first version of the product commenced in 1985 and was known as the Pensioner Loan Scheme (PLS).
A few policy tweaks later, it was rebranded in 2022 as ‘Home Equity Access Scheme’ (HEAS).
The HEAS product offers a very low interest rate (circa 3.95 percent, compounded fortnightly).
But the government product is only available for retirees with nominal assets such that they depend on a taxpayer-funded aged pension. Loan application assessment requires that the drawdown amount does not push the borrower outside of the pension Asset Test rules.
Reverse Mortgages offered by commercial institutions will (understandably) charge higher interest rates, but their broader product availability enables more people to free-up more equity to support better quality lifestyles.
Until 2018, several major banks use to offer Reverse Mortgages. But reports of corporate greed and preying on the vulnerable became a reputation risk which progressively saw them all exit the market.
Currently, there are two (2) privately-owned funders offering Reverse Mortgages to Australians.
- Heartland Bank: a NZ-based company which began as a building society way back in 1875.
- Household Capital: seizing on the opportunity created by the big banks exiting the Australian market, Household Capital entered in 2019. Global insurance giant, Helia (formerly Genworth), identified the enormous opportunity for this lateral-thinking product and acquired a 22 percent stake in Household Capital in 2022.
Reverse Mortgages might play an important role for some people and will not be appropriate for others.
What is indisputable though is the bigger the size of one’s total asset base purchased during their 45-years in the workforce, the more equity will accumulate and the greater potential for more revenue to support a better-quality lifestyle for 20-30 years after exiting the workforce.
The information in this report is general in nature and is supplied with the intention of encouraging everyone to devote more time to planning their financial future, to opening people’s minds to more options and to stimulate healthy discussion.
Please don’t be a douchebag and act on the contents of this report without first obtaining personal advice from an appropriately qualified professional.
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