Pension Loan scheme, a reverse mortgage scheme floated by the government does a better job at satisfying the appetite of the senior citizens than the ones floated by the private sector. Where it possibly fails is that it gets limited to the betterment of the rich retirees. And to make matters worse, one particular aspect of it is so very puzzling. See if you can make some sense out of it.
What is reverse mortgage?
Before going into the scheme let us ponder on what reverse mortgage is. To define, it is an equity release product which permits homeowners to take a loan on the equity they have built on their home. This equity can be forwarded as a loan; either as a lump sum or as a monthly income stream. It is needless to say that the loan is only repaid when the home is sold. In absence of repayments, the loan interest is capitalised.
Debt can balloon fast
The pitfall associated with reverse mortgage is that the debt can really balloon over long stretches of time and also there may be a considerable impact on the age pension eligibility.
Centrelink reverse mortgage (a government initiative)
Centrelink and Department of Veterans’ Affairs’s offer, the Pension Loan Scheme, needs to be taken as an income stream. Further, the loan has to be meted out in a way such that the income stream added to the part pension takes the tally to the maximum pension. The fixed interest rate in question is 5.25% and is clearly lower than what many providers charge for their reverse mortgage products. Till here, it sounds commendable. However, it is not all rosy.
The scheme confuses quite a bit
Those retirees who are on the full age pension and have their own homes cannot find any succour to their income through this government plan. Funnily, those retirees who are not eligible for the full age pension can go for the scheme. For what benefit, one can’t keep from asking though? Bizarre!
The asset and the income tests
What is even stranger is that retirees who are self-funded and are property owners can reach out to the scheme despite lacking eligibility for age pension (through either the asset or the income test). Those who lack eligibility under both the tests cannot opt for the scheme. So, to put it in a nutshell, the reverse mortgage scheme works best for those who need it the minimum. It is not unnatural then that the retirees are opting for private providers.
Centrelink caters to the rich retirees
As per the notification of the government, the age pension scheme has the age pension rate as the upper ceiling. The private providers, on the other hand, can lend more and that, too, as a lump sum. Moreover, the “boot home” point is that what use is a scheme when it can only cater to the needs of the not-needy.
The Australia Institute believes that the scheme should ideally be made accessible to anyone who has reached the pension age. The money should be forwarded as a loan (enough to pay a fortnightly income reaching up to the age pension rate). If there is a retiree on a full age pension and he owns a property, he can attempt to double his retirement income through this scheme. Of course, much would depend on the age of the home and its latest appraised value.
Expansion of the scheme may meet stiff resistance
When it comes to the better off retirees (those who can’t avail the age pension), it suffices to say that they would be able to secure borrowings totalling up to the full age pension. If this scheme were to be expanded, it would certainly meet with one hell of a resistance from the private reverse mortgage providers.
Smart equity release products in the market
In my opinion, reverse mortgage has long suffered from bad press. Neither the government packages nor the dish-outs of the private providers have been spared a knuckle blow. Presently, there are too many likeable products in the market and the rules, which gave an impression of having slackened a wee bit too much, have tightened over the course of last few years.
Accumulated Super will cater to about 7 million people in the next 4 decades but market volatility and paltry retirement income products will make it difficult for retirees to make their Super balances run long enough. Home reversion products and equity release products like reverse mortgage can make a sizeable contribution if they are sincere to the task.
Need to educate reverse mortgagors
As a first, there is a need to educate those who are the main participants in the reverse mortgage deal. There are quite a few myths doing the rounds. For one, you cannot give away all your equity. Government imposes an upper ceiling on what you can borrow against your home.
Non-recourse loan contract
Also, for safeguarding the consumers, a non-recourse loan contract is established (something that is given a lot many tweaks and what finally reaches the consumers is, “hey, there is a monstrous contract waiting to take you to the court!”. A non-recourse loan only implies that in the event of a default the lender cannot attach any asset other than the one used as a collateral. Also, there is a no-negative guarantee which asserts that the worth of house can never be superseded by what a reverse mortgagor owes.
Capitalised interest and its implication
The interest capitalises. The implications are long-reaching and do not deter your immediate goals. The capitalised interest compounds and with time turns into a rock-heavy amount. After all, interest keeps getting added to the principal, increasing the debt and decreasing the equity. To reiterate, the good points are that 1) the debt can never exceed the home’s worth and 2) it need not be paid except at the time the home is sold or at the demise of the reverse mortgagor.
The more aged you are the more you can borrow
So if you are 60 years of age (for availing certain products you need to be 70), you can avail something between 20% and 40% of your home’s worth (appraised conservatively). There are certain products which ask you to repay the loan if you leave the premises against which the loan is secured. Case in point is when someone moves to a Residential Age Care.
It is generally believed that as you go higher up the age ladder, your borrowings can increase. To elaborate through illustration, a 60 year old can borrow roughly 20% of her home’s worth while a 80 year old can borrow as much as 40% (1% for every year).