Centrelink – Pensions Loan Scheme
Federal government changes to the Pensions Loan Scheme allowing retirees to boost their income through a reverse mortgage on the family home come into effect on 1ST July 2019.
The amendments to the existing Pensions Loan Scheme announced in the 2018 federal budget have two key components making the scheme more accessible to a greater number of retirees.
A reverse mortgage could be a way for cash poor retirees to unlock equity in their homes to help pay for day-to-day expenses.
Pension Loan Scheme changes:
- The enhanced Pensions Loan Scheme will now be open to full aged pensioners and self-funded retirees. Previously only eligible pensioners were able to access the scheme.
- The amount available to be borrowed has increased to up to 150 per cent of the maximum fortnightly pension rate.
Modelling shows a single person will now be able to borrow up to a maximum $36,000 per year and a couple could potentially borrow up to a maximum $54,000 per year, paid in fortnightly instalments.
Part or full age pensioners can borrow the difference between the current age pension and the maximum 150 per cent rate. For example, a single person on a full age pension of $24,000 could borrow up to $12,000 each year as a loan, bringing their total cashflow from the age pension and the loan to the maximum $36,000.
A reverse mortgage allows retirees to increase their cash flow, while staying in the family home. However, it won’t be right for everyone and there are many things retirees should weigh up before applying for the Pensions Loan Scheme.
A reverse mortgage will reduce the value of your family home when it is sold. Under the government’s Pensions Loans Scheme retirees are charged a compounding variable interest rate of 5.25 per cent per annum.
When the family home is sold, the amount owed will be deducted from the sale price of the home. Interest is added to the outstanding loan balance each fortnight until it is repaid in full. The longer it takes to repay the loan, the more interest is paid.
For retirees the Pensions Loan Scheme provides an opportunity to free up some equity that they have in their home. This may help bridge the funding gap while looking to secure aged care or while they await an ACAT assessment.
The downside is that their estate often will be left to pay the outstanding loan, potentially leaving less inheritance. Retirees should carefully consider their personal situation to work out if this is a viable option for them.
For more information on applying for a Pensions Loan Scheme visit https://www.humanservices.gov.au/individuals/services/centrelink/pension-loans-scheme