Reverse mortgages

Q: I have been told the government has a reverse mortgage facility that is available to older Australians. My wife is and I are both 76 years old and our home is worth about $1.2 million.

A: The Pensions Loan scheme (PLS) is broadly available to retirees of Age Pension age who own Australian property.

The PLS operates like a reverse mortgage. Unlike a conventional reverse mortgage, pensioners cannot borrow a lump sum, rather it is paid on a fortnightly as part of the Age Pension.

Under the PLS, recipients are able to supplement their fortnightly pension up to a maximum of 150% of the maximum fortnightly Age Pension rate including pension and energy supplements. If you and your wife currently received the maximum fortnightly Age Pension of $1,423, you would be able to receive a combined additional payment of up to $711 per fortnight as PLS payment. Or if you currently do not received the Age Pension, you could receive up to $2134 per fortnight in addition to other income you receive.

The PLS will continue to be payable until the recipient reaches their maximum loan amount. The maximum loan depends upon your age when you apply for a loan, the value of your property and how much equity you would like to retain in your home.

The maximum loan amount is broadly calculated by applying a factor based on the age of the youngest owner of the property multiplied by the value of the property divided by $10,000. As you are both aged 76, the calculation would be $3,900 x $1,200,000 divided by $10,000 = $468,000.

If you wish to retain greater equity in the property to be guaranteed to your estate on your death, then the portion you wish to retain would not be factored into the calculations. For example, if you wanted to retain $600,000 of equity, the maximum loan would be $3,900 x $600,000 divided by $10,000 = $234,000.

The maximum loan is not fixed and can be varied as your circumstances change. Existing PLS recipients are eligible to extend their loans up to 150% of the maximum fortnightly Age Pension rate subject equity and age restrictions.

Interest accrues against the debt until the loan is repaid. The current interest rate charged is 4.5% per annum (capitalised fortnightly).

You are responsible for paying all costs associated with the loan e.g. legal fees.

The loan is generally repaid from your estate on the death of the surviving spouse, however, if you receive a windfall gain such as an inheritance or sell the property you can repay the loan all or in part at any time. The outstanding loan balance will comprise the principal loan amount plus accrued interest plus costs minus any amounts already repaid.

Top up pension payments received from a PLS are not assessed for income or assets test purposes. Payments received do not count as taxable income nor are they counted towards taxable income in calculating Senior and Pensioners Tax offset or the Low Income Offset.

Before deciding to establish a PLS, there are a number of issues you should consider: You will be reducing the equity in your home as a consequence of the amount you borrow. You need to consider the impact of the compounding effects of the interest costs over time. If you need to move into an Aged Care facility, you may impact your ability to pay future accommodation costs. You also need to consider the consequences for the surviving spouse if they do not have title to the property or are not a beneficiary of the property.

Please note that the popularity of the scheme has meant that PLS applications are currently taking in excess of 15 weeks to be assessed, so start the application process early.

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