Many retirees are living the asset-rich and cash-poor contradiction, for example living in a $2 million home in Sydney, while surviving on $400 per week from the Aged Pension.
While some people will happily downsize from the family home in order to free up some cash for living expenses, this is not ideal in all cases. There is the cost of stamp duty in purchasing an alternative, albeit cheaper home. There is a physical and emotional burden of moving out of their long-term family home at an elderly age. Further, selling a large asset and ending up with cash in a bank account may reduce or eliminate entitlement to the Aged Pension.
The concept of “Equity Release” is an alternative to downsizing, which despite some wariness of the concept amongst retirees and their families, does indeed have a place in some circumstances as part of a comprehensive financial plan.
Equity release is any product that converts savings locked up in the family home into cash that can be used for any purpose. For those who do not have enough retirement income, equity release can transform their quality of life.
What is Equity Release?
Equity Release involves a no-repayment loan secured against the home. The loan is designed to continue for the remaining life of the senior homeowner. Interest charges are automatically added to the loan, which means the amount owing increases the longer the loan is in place. The final amount owing varies with interest rates and the number of years it is needed. The loan is typically repaid from the estate.
- Financial Advice: You will be required to seek independent financial advice paying particular attention to any affect that equity release might have on any Centrelink entitlements. While your home is not included in the Assets Test for the Age Pension, cash in a bank account is counted. Your financial advisor can help you assess the ramifications of this. One option is to set up a reverse mortgage to provide you with regular income rather than a lump sum of cash.
- Legal Advice: You will also be required to obtain independent legal advice on the specific equity release transaction you are entering into.
- Forecasting: We will forecast and explain to you the balance of a reverse mortgage over the years, factoring in “what ifs” such as changes in interest rates and property prices, using the specially designed ASIC online tool.
The Failsafe: ‘No Negative Equity Guarantee’
Under Federal law introduced in 2012, the proceeds from the sale of the home will always be enough to repay the reverse mortgage in full, regardless of how long you remain living in the home. The homeowner cannot be forced to sell in any circumstances. Further some reverse mortgage products allow you to protect a portion of the value of your home, commonly 20%.
Consumer Protection and SEQUAL Accreditation
The level of regulation and protection for equity release customers is higher than most financial products. Edney Ryan Mortgage & Finance is accredited to arrange these through SEQUAL, an industry association dedicated to enabling equity release in a secure and protected manner. Without accreditation, a broker cannot arrange a reverse mortgage. Laws introduced in 2012 boosted protection for reverse mortgage customers. These enshrined in law many of the voluntary safeguards SEQUAL had developed for its members and customers over the previous decade.
Is This Right for You?
Assessing the appropriateness of equity release must be a collaborative effort between you, your accredited finance broker, certified financial advisor and your lawyer. Equity Release should be just one component of a comprehensive financial plan, to ensure that your superannuation, pension entitlements and other investments are being handled to your maximum benefit.
Patricia Williams is a credit representative (400458) of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237).