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Want to be ‘carried out in a box’? How retirees can tap into the value of their homes
By Kaye Fallick
Nearly three-quarters of retirees aged 65 or over live in homes they own, and given the current housing market shortages, most will feel grateful that they have secure accommodation.
But there are many other aspects of homeownership in retirement that are frequently overlooked or misunderstood. Here are three things that many people may not fully appreciate about the massive upside of homeownership in retirement.
What can you do with the significant portion of wealth tied up in the family home? Is there a safe way to access it?Credit: Peter Riches
1. Your home is often your greatest source of wealth. Broadly speaking, there are five main ways to fund your retirement. These are the age pension, superannuation savings, private savings and investments, work income and home equity.
Most attention is centred on the role of the pension and savings in super. But median savings in super for those aged 65 to 69 are $213,986 for men and $201,233 for women. These savings pale in significance when compared with the median value of homes in Australian capital cities ($997,000). In fact, more than $1 trillion in wealth is held by Australian retirees in their homes.
2. Your home represents more than just money. It is difficult to estimate the value of secure accommodation as you age, but as the World Economic Forum emphasises, the ability to stay in a familiar, comfortable neighbourhood with reliable access to services is key to longevity wellness.
Many retirees hope to stay in their own homes and age in place by making appropriate renovations to ensure the accessibility and suitability of their premises along the way.
There’s one major problem with downsizing: the vast majority of older Australians just don’t want to do it.
3. Age pension entitlements tend to favour homeowners. With approximately 67 per cent of older Australians receiving either a full or part pension, the way the means test is applied is of critical importance.
The way assets are tested – and therefore how deeming is applied – currently means that non-homeowners are assessed as earning a higher income than those who do own a home.
Despite this, the “old days” when the vast bulk of retirees would leave full-time work without a mortgage are fast disappearing. Australian Bureau of Statistics data suggests the next wave of retirees, those aged 55 to 59, are quite heavily indebted, with more than 50 per cent still carrying a mortgage.
This is an increase in indebtedness of 23 per cent since 2002-03. So owning a home isn’t quite the same thing now as it once was. If you are in your 60s, renegotiating loans as interest rates rise is a challenge; few banks will consider giving you a 25-year loan. Yes, it may be ageism, but regardless, it’s a fact of life for many older borrowers.
Downsizing is often presented as a logical potential solution to debt in retirement. Government legislation has been introduced to allow older Australians (from age 55) to take advantage of the move to a less expensive property, banking the profits in super.
Downsizer contributions allow each individual to contribute $300,000 into super, which means couples might contribute a massive $600,000 in one year.
But there’s one major problem with downsizing: the vast majority of older Australians just don’t want to do it. Research conducted by Professor Rachel Ong ViforJ showed 67 per cent of retirees strongly prefer to remain in their current neighbourhood and 19 per cent have a moderate desire to do so.
With 86 per cent saying no thanks, the strategy of downsizing is unlikely to be the main solution for indebted retirees.
So what can you do with the significant portion of wealth tied up in the family home? Is there a safe way to access it?
There are two main ways of accessing this equity. The first is by using the Home Equity Access Scheme (HEAS), which was first introduced as a Pension Loans Scheme (PLS) by the Hawke Government in 1985.
For years the uptake was very low, which may have been a reflection of the low level of indebtedness of retirees in the 1990s. More recently, when the scheme was renamed, the access was widened to those who are not receiving pension benefits and the amounts available were increased. The loan amounts may also now be taken as lump sums, not just as regular payments.
Unsurprisingly, the uptake of HEAS is now reported to be increasing at an annual rate of 60 per cent.
The other main way of accessing wealth in the family home is by using a reverse mortgage, also referred to as a household loan. These loans, too, have evolved to reflect the needs and expectations of retirees.
The first round of reverse mortgages introduced in Australia in the 1990s (largely based on similar products in the UK) had a poor reputation, with people at risk of borrowing more than the net value of their residence.
In 2012, the No Negative Equity Guarantee (NNEG) legislation was introduced, meaning neither the homeowner nor their estate could ever owe more than the property is worth when it is eventually sold. Since then, these loans – specifically created to assist older Australians who find it difficult to get a loan elsewhere – have increased in popularity.
Josh Funder, founder of Household Capital, one of Australia’s largest household lenders, says a household loan can work well for the components of a longer-term retirement.
“Typically retirees are using the wealth in their homes for refinancing a bank mortgage, renovations, funding aged care, or helping out adult kids. Many borrowers will also draw on these funds as an income to keep up with the rising cost of living where Centrelink benefits or superannuation are inadequate,” he says.
With Centrelink entitlements based on income and asset limits, it’s important for those who decide to access wealth in their homes to organise the transfer of these funds in a way that doesn’t threaten their entitlements. This is eminently doable, but many retirees may wish to seek support from a financial professional to ensure they do so according to the rules.
These changes mean it has never been easier or safer to withdraw funds from your home to enable a better life in retirement and remain in your home – meaning the ‘carry me out in a box’ brigade is alive and kicking!
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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