How home equity could help pay for elderly care
How home equity could help pay for elderly care

It is no coincidence that the government earlier this year rebranded its reverse mortgage product from the pension loan scheme to the home equity access scheme, with a more competitive interest rate.

The scheme – available to all eligible Australians over retirement age (not just pensioners) who own Australian property – provides access to the equity in your home to boost cash flow.

How it might help

In addition to limited government subsidized programs and packages, this would potentially provide money that could be used to fund additional services and care that would allow you to live independently at home longer, including funds for home repairs and maintenance or alterations, as well as gardening, cleaning and personal care.

Given the different ways to fund residential care, home equity could also be used to pay for day-to-day costs.

It is only upon the death of the owner or the sale of the property that the loan must be repaid.

Under this scheme, you can top up the fortnightly pension up to a maximum of 150 per cent of the fortnightly age pension rate, including pension and energy supplements and any rental assistance.

You do not have to be in receipt of an old age pension to qualify for the payments.

Boosted income

According to the Pension Boost advisor’s calculator, self-funded retired couples could increase their annual income by $2,233 per fortnight (or $58,063 per year) and self-funded singles by $1,481 per fortnight (or $38,516 per year) .

The maximum loan depends on your age at the time of the application, the value of your property and the equity in your property that you wish to keep.

By July this year, it is expected to be possible to receive lump sum payments instead of an income stream.

This government program, available only through Services Australia, is in addition to a number of private sector reverse mortgage and capital release programs offered, including by Heartland Finance, IMB Bank, Gateway Bank, Household Capital and the Australian Seniors Advisory Group. Boomer Home Loans will be the latest specialist lender for the over 55s when it launches this week.

The recognition that for many people most of their wealth is in their home is not new. The superannuation could possibly fill a gap, but perhaps not for many women who not only tend to live longer than men, but also have lower retirement savings due to multiple and compounding inequalities.

Leveraging home equity won’t suit everyone, especially those who don’t want to leave the next generation in debt or beneficiaries who don’t want to inherit a home with money owed.

But as Paul Dwyer, equity loan specialist and director of Team Australia Mortgage Solutions, points out, with a move to residential care for the elderly, the emotional effect of having to sell a home to make the move can be extremely detrimental to that person.

He says that if a house was kept and $2,600 a month was drawn down for two years to pay for housing costs, assuming 3% growth, the same equity would be held two years from now.

In contrast, if someone had sold a parent’s property two years ago, a significant portion of the capital raise would have been lost, a large portion of the means-tested childcare costs paid, and potentially all of the lost old age pension payments.

It’s worth investigating the available calculators, including Pension Boost and the government’s Money Smart reverse mortgage and capital release calculator, to see what the potential impact of borrowing on the home might be.

Depending on how much extra you need, even with modest real estate growth, the remaining equity in five, 10, or 20 years may be higher than you think.

Case study

Andrew Biviano, Head of Lifestyle and Care at Alteris Financial Group, offers the following example of a move to residential care.

Angela, 89, is a full-time pensioner living in Sydney and needs permanent care in an aged care home. She owns her house and it’s worth $2 million. Angela doesn’t want to sell or rent out her house to fund her housing or childcare costs. His only other assets are $75,000 in savings and personal assets of $5,000.

The reimbursable accommodation payment at Angela’s chosen aged care facility is $650,000 and can be paid as a lump sum, daily accommodation payment (DAP), or a combination of the two.

To help fund her eldercare costs, Angela decides to take out a principal-released loan to pay for the amount of accommodation as DAP, which equals $26,455 per year, based on the rate interest rate of 4.07%.

Assuming she lived for five years, basic daily care costs and means-tested childcare costs could be funded by the old-age pension, which she would continue to receive for two years after being cared for. After that, the full value of the house would count towards the old age pension and she would have to use her cash savings to cover those costs, which would be reduced to around $20,000.

After five years, the principal-released loan that is used to pay the DAP of $26,455 per year secured by his $2 million home would have increased to $152,953, based on interest at 5.6 % per year capitalized over the period. If the capital growth on the property were 2% per year, the equity in the home would be approximately $2,055,209.

The Council on Aging has always insisted that a good capital release program be included in the larger landscape of user-paid aged care. It won’t suit everyone, but it can be a good safety net, says COTA chief executive Ian Yates.

Indeed, if we ever manage to offer a system of care for the elderly of which we are proud, we must be ready to contribute to it individually.

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