The revised Pension Loans Scheme, intended to provide an income boost to a greater number of retirees, is now in effect.
The amended Pension Loans Scheme allows pensioners to access a reverse mortgage from the government as long as they own real estate with enough equity to secure the loan, have adequate insurance covering the secured real estate, and are of pension age or older (66 years and over).
The scope of the federal government’s Pension Loans Scheme was expanded in the 2018 federal budget to make it accessible to more retirees.
The revised scheme, which came into effect on Monday (1 July), is open to full-aged pensioners and self-funded retirees, as opposed to just eligible pensioners, and the amount that can be borrowed has been raised to up to 150 per cent of the maximum fortnightly pension rate.
Modelling by wealth giant AMP suggests that, under the revised scheme, a single person would be able to borrow up to $36,000 per year, while a couple could borrow up to $54,000 a year, paid in fortnightly instalments.
This means a single person on a full-age pension of $24,000 could borrow up to $12,000 against their home each year, bringing their total cash flow from the age pension and the loan to the maximum of $36,000, AMP explained.
Like other reverse mortgages, the government takes back the amount borrowed once the pensioner passes away and/or their home is sold, with the remainder of the sale going to heirs.
Last month, AMP’s technical strategy manager, John Perri, advised retirees to take into careful consideration both the pros and cons of taking out a reverse mortgage to ensure it’s suitable for their personal circumstances.
One of the “most important” points to keep in mind, according to the AMP technical strategy manager, is that a reverse mortgage will reduce the value of the home when it is eventually sold – a risk that Moody’s Investors Service highlighted when revealing its new methodology for analysing reverse mortgage risks.
“Under the government’s Pension Loans Scheme, retirees are charged a compounding variable interest rate of 5.25 per cent per annum,” Mr Perri said.
“When the family home is sold, the amount owed will be deducted from the sale price of the home. Interest is added to the outstanding loan balance each fortnight until it is repaid in full. The longer it takes to repay the loan, the more interest is paid.”
Retirees must also keep in mind the “downside” that the scheme could reduce the inheritance they pass on to their children if the succeeding generation is left to pay their outstanding loans, the AMP technical strategy manager said.
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