Pension Loans Scheme: Commendable But Confusing?
06 February 2017
The Pension Loans Scheme, offered by the Australian Government through Centrelink, is not only commendable but also a validation of sorts for private sector efforts to provide Reverse Mortgages as a way for senior Australians to release home equity. However, there are certain aspects of this ‘government ‘reverse mortgage scheme’ many could find a bit confusing. The purpose of this post is to clarify and explain differences for Australian seniors between a traditional Reverse Mortgage loan and the Pension Loans Scheme.
For the benefit of those who are not aware of what Reverse Mortgage is, let’s define it first before discussing the Pension Loans Scheme. Many Australian seniors are now living in homes that hold much of their wealth. A reverse mortgage enables you to access this wealth without the need to sell your home.
Most Reverse Mortgages offered by private providers are designed to help seniors manage their financial requirements by accessing the amount of money they need, as and when required. For example, at Heartland we offer three flexible loan drawdown options: lump sum, regular advance (annual, quarterly or monthly draw), or cash reserve.
The amount of money you can borrow from a Reverse Mortgage lender depends on several factors such as property value and your age. You continue to own your home, benefiting from any increase in the value of your property and you can live there as long as you wish. No repayments are required while you are living in the home; however you are free to do so at any time.
The Pension Loans Scheme, offered by Centrelink and the Department of Veterans’ Affairs, is similar to a private sector Reverse Mortgage, because it also uses home equity to provide a loan to seniors. However this loan can only be taken as an income stream, which is added to the recipient’s part pension, and can only be paid up to the maximum pension. It comes with a fixed interest rate at 5.25 %, which is lower compared to the variable interest rates we charge at 6.19 % p.a. (Comparison Rate 6.21% p.a.)^.
Sadly, not all Australian seniors can benefit from the Pension Loans Scheme. Mainly, it is not suitable for seniors who are in need of lump sum cash as this scheme is only available as an income stream. Hence, it does not meet the need of seniors who would like to release funds to complete home renovations, provide for aged care or repay debt. [Related Post: Aged Care Update]
And I can’t help but think that the scheme is designed for retirees who are already reasonably well-off. The maximum payment available under the Pension Loans Scheme is the full aged pension. As a result, full aged pensioners usually do not qualify at all, and self-funded retirees who have their own properties can access the scheme even if they are not eligible for the age pension. Even a wealthy Australian, such as Lindsay Fox, may be able to obtain a Pension Loan while a full aged pensioner may not.
As discussed in this blog post, full age pensioners may not be eligible for the Pension Loans Scheme offered by the Australian Government. A good alternative may be to take a Reverse Mortgage loan from a specialist provider such as Heartland*.
Our Reverse Mortgage is very flexible and can help you if you want to unlock your home equity and are in need of lump sum to finance needs such as home renovation, debt consolidation, aged care, and more. It is also good if you would like to supplement your retirement income, regardless of pension level, so you can live the retirement you deserve.
*Applications for a Heartland Seniors Finance Reverse Mortgage are subject to our normal loan approval criteria, which includes a valuation. Full terms and conditions will be included in any loan offer.
^ This rate is current as at 27th January 2017. The comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
Information provided is accurate as at 06 February 2017 and may change from time to time