Navigating the new Pensioners Loan Scheme

Age pensioners may be able to borrow up to $54,000 against their family home from July 1 but retirees must weigh individual circumstances before applying for the revamped Pensioners Loan Scheme, says AMP.

The scope of the Pensioners Loan Scheme, which allows older Australians to borrow money against their homes to supplement their income while in retirement, was expanded in last year's budget following calls from the industry, including The Australian Institute.

The expanded scheme comes into effect on July 1.

"A reverse mortgage allows retirees to increase their cash flow, while staying in the family home. However, it won't be right for everyone and there are many things retirees should weigh up before applying for the Pensioners Loan Scheme," said AMP technical strategy manager John Perri.

AMP's modelling

The two key changes to the scheme mean that first, it will now be open to self-funded retirees as well as full aged pensioners (as opposed to just eligible pensioners previously) and second, the amount available to borrow has increased to up to 150% of the maximum fortnightly pension rate.

The changes translate to a maximum borrowing of $36,000 per year for a single and a $54,000 per year for a couple, paid in fortnightly instalments, according to AMP's modelling.

"Part or full age pensioners can borrow the difference between the current age pension and the maximum 150% rate. For example, a single person on a full age pension of $24,000 could borrow up to $12,000 each year as a loan, bringing their total cashflow from the age pension and the loan to the maximum $36,000," AMP said.

Not for everyone

While the scheme has potential for retirees to increase their cash flow while staying in their home, it may not be right for everyone, Perri warned.

"The most important consideration is a reverse mortgage will reduce the value of your family home when it is sold. Under the government's Pensioners Loan Scheme retirees are charged a compounding variable interest rate of 5.25% per annum," he 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 consider if the scheme could erode the inheritance they pass on to their children, if the latter generation has to pay their outstanding loans.

"For retirees the Pensioners Loan Scheme provides an opportunity to free up some equity that they have in their home. This may help bridge the funding gap while looking to secure aged care or while they await an ACAT assessment," Perri said.

"The downside is that their estate often will be left to pay the outstanding loan, potentially leaving less inheritance to the kids."

Retirees should carefully consider their personal situation to determine if this is a viable option for them, he added.

Read more: Pensioners Loan SchemeReverse mortgageJohn PerriRetirement incomeThe Australian Institute
Link to something hS8ff2MS