[ September 11, 2015 ]
It’s not unusual to encounter older “house rich cash poor” clients, literally sitting in multi-million dollar homes but living hand to mouth on the old age pension.
One good solution is a reverse mortgage.
Provided the levers are set conservatively, and everything is explained appropriately, reverse mortgages can improve clients’ quality of life and better balance their need to live well now with their desire to leave something to the kids later.
An example may help. A doctor client complained that he was expected to subsidize his parents’ living costs with no contribution, or appreciation, from his siblings. Our solution was to arrange a reverse mortgage, ie a loan in the name of his parents secured against their home and used to pay their living costs. The amount was set at $2,500 per calendar month, and this, plus the (tax free) old age pension was more than enough to live comfortably.
Their home was worth more than $1,000,000. So, realistically, the loan was never going to catch up with their equity (in fact the home has risen in value and their net equity is now greater than ever). Grandma and grandpa are happy, which is the main thing, and they did not have to sell their beloved family home.
Our client is even happier: his two siblings are now in effect each paying for one third of his parents’ living costs… via a reduced inheritance.
Our client guaranteed the parents’ loan. This was not seen as a risk as there is plenty of equity in the home and it meant the transaction could happen at a sensible interest rate.
You can read more about reverse mortgages here: Advisers to educate retirees on reverse mortgages.
Another kind of loan arrangement that has much in common with a reverse mortgage is provided by Centrelink.
Centrelink’s Pension Loan Scheme (PLS) allows a retired person on a part age pension to borrow modest amounts against the security of their home (or other property) at 5.4% per annum interest to subsidise their living costs.
The PLS is a limited scale and safe reverse mortgage.
The amount of the loan is limited to the difference between the full pension and the part pension, so in a way it’s a top up facility. It’s paid fortnightly as part of the usual age pension payment process.
Not everyone is eligible. Persons who receive a full age pension are not eligible. And persons who fail both the assets test and the income test are not eligible. Interestingly, people who fail just one of these tests (and therefore do not receive any pension at all) are also eligible.
PLS loans are not that common, and it’s hard to see why. They make a lot of sense, and the relatively low cap, ie the difference between the actual pension and the full pension, means it’s unlikely age-pensioners will be evicted from their homes by Centrelink.
If a married couple’s client’s part pension was say $5,000 and their full pension $23,160 the amount of the loan would be capped at $18,160 a year or about $700 a fortnight. If their home is worth say $700,000, and is otherwise unencumbered, it is unlikely that the loan will ever catch up with the value, or even come close.
The extra $700 a fortnight will make all the difference to your client’s day-to-day quality of life and allow them to avoid selling their home or other quality assets.
Let your older clients know about the Centrelink PLS. It’s a great idea and awareness of it can help reduce the anxiety of ageing.
You can learn about the Centrelink PLS here: Centrelink Pension Loan Scheme.