Retirees who will soon have the option of increasing their income through reverse mortgages on the family home should tread cautiously if they are considering such a move, an AMP superannuation expert has warned.
The Pension Loans Scheme changes, announced as part of the 2018 federal budget and effective from 1 July, will allow full age pensioners and self-funded retirees to access the scheme, in addition to the eligible pensioners who currently have access.
The amount available to be borrowed is also set to increase to up to 150 per cent of the maximum fortnightly pension rate as part of the planned changes.
AMP technical strategy manager John Perri said reverse mortgages provided a way for cash-poor retirees to boost their income, but warned retirees against applying for such loans without careful consideration of the downsides.
“The most important consideration is a reverse mortgage will reduce the value of your family home when it is sold. Under the government’s Pension Loans Scheme, retirees are charged a compounding variable interest rate of 5.25 per cent per annum,” 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.”
According to modelling conducted by AMP, the increase in the maximum fortnightly pension rate will allow a single eligible pensioner to borrow as much as $36,000 a year and a couple to borrow as much as $54,000, and will enable part or full age pensioners to borrow the difference between the current age pension and the maximum 150 per cent rate.
Perri noted that while the scheme was an opportunity to free up equity in the family home to help cover day-to-day expenses, retirees should be aware their estate was likely to be left to pay the outstanding loan, which could result in a smaller inheritance for their children.
“Retirees should carefully consider their personal situation to work out if this is a viable option for them,” he said.
