Whether a reverse mortgage will affect your aged pension depends on your individual circumstances, including how you plan to receive the money and how you plan to use it. Do you want to receive the money as a lump sum? As an income stream? Do you plan to spend the money on a non-assessable asset such as a holiday or renovations? Here are some things you should know about reverse mortgages for senior citizens and the aged pension.
A reverse mortgage scheme for senior citizens involves giving a mortgage provider, bank, or other party a portion of the equity of your house. Equity is typically defined as the value of your property, less any money you owe on it. In return for giving that other party a portion of the equity on your house, you will receive either a regular income payment, a lump sum, or credit. If you prefer, you should also have the option to choose a combination of those three payments.
As part of the reverse mortgage scheme, you do not have to make any repayments unless you eventually move out or sell the property. If you prefer, you can usually make repayments early. Certain reverse mortgagees are designed specifically for senior citizens, helping you use the money from your equity to pay for your costs of living and repairs to your property so that you can tailor it to your new lifestyle. It should be noted that your property’s value and your age usually determine the percentage of the value of your property that you can give to the third party.
For seniors living in Australia, a reverse mortgage could mean that you have more income to spend throughout your retirement years. Here is a breakdown of what it would look like:
Say you are a single pensioner, and you own a house that is worth $500,000. You want to make renovations to your home to suit your new lifestyle and you want to travel abroad to visit your family. To help pay for the renovations and the travel, you take out a reverse mortgage for $50,000 and opt to receive it as a lump sum. The value of your property increases over time and, when you pass away, your children, i.e., your beneficiaries, sell the home for $700,000. In this common scenario, the bank would be owed the $50,000 as well as the interest that accumulated since you took out the reverse mortgage.
Your individual circumstances usually dictate what effect your reverse mortgage will have on your eligibility for the aged pension. Among the critical factors you should consider are how you plan to use the funds from the reverse mortgage. Here are the different ways you can get your money from your reverse mortgage:
Take the money as a lump sum. If you take the money as a lump sum and spend it on a car or another asset, the value then counts toward the pension’s asset test. Excluding the value of your property, that would combine with your other assets, which has the potential to exceed a certain limit and therefore reduce your pension. The threshold for when pensions start to reduce (enacted on July 1, 2018) is when your assets are higher than $258,500 for single homeowners, or $387,500 for a couple or combined homeowners. Additionally, if you spend the reverse mortgage lump sum on a non-assessable asset like a holiday or renovations, the amount is not assessed under the assets or income test.
Take the money as an income stream. Your pension will likely remain unaffected if you take the loan as a regular income stream to spend on non-assessable assets or living expenses. It shouldn’t have an impact on your age pension because it isn’t counted as income by the income test. The same is true if you spend quickly on lifestyle and bills. It is subject to the assets tests, however, if the funds build up in your bank account.
Keep the money in reserve, similar to a line of credit. Money that is not yet drawn down but that is available to you for the future is not assessed under the assets or income tests.