Hi Nicole,
I am not sure if you are able to assist with this inquiry regarding Centrelink's reverse mortgage scheme … are you familiar with it?
My wife and I are aged 70 and 75 respectively, both are on full aged pensions, own our Southern Highlands home and have about $130,000 invested with Challenger (through Westpac).
Given these facts, do you think we might be eligible for a reverse mortgage loan (say $200,000) with Centrelink and, if so, how might it affect our pension?
Don, Southern Highlands
I'm afraid not, Don. Which is a shame, because the scheme is cheap.
But let's back up for other readers. Reverse mortgages are appealing to people who are asset-rich – thank you, house prices – but income-poor.
Commercial ones allow you to extract "equity" from your home in the form of a lump sum or a regular income stream. The government offers a reverse mortgage alternative through the Pension Loans Scheme.
Like a regular reverse mortgage, you make no repayments during your lifetime and interest is compounded with the home or other property used as security. They would usually sell it when you die (so your kids may not love this idea – but you've earned it!). You should also be able to sell up and repay the debt from the proceeds – check.
The Centrelink version charges about 1 percentage point less than the rest – currently 5.25 per cent. The catch is you can only borrow for a regular income and only to the extent that this tops you up to the maximum age pension rate. You're already there.
If you're still keen on the idea, that leaves you with open-market reverse mortgage products, which would allow you to borrow a lump sum (and capitalise interest and fees). Aged Care Steps' Louise Biti says: "Aged care loans are a variation as they allow the loan to continue for a fixed number of years (usually five) after you move into residential aged care and may have a lower interest rate."
Your other so-called equity release alternative is a home reversion scheme, where you sell part of your home at today's prices and so trade off price growth in the future for a lump sum today.
Make your decision based on interest rates, fees and legal costs, your obligations (including in relation to home maintenance and repairs), your need for capital or regular income, and the location and value of your home.
Make it also on this comparison I've asked Aged Care Steps to prepare for you, assuming $500 a fortnight income for 10 years and a $700,000 house that grows at 3 per cent a year.
The Nicole Helps column will resume on January 29.