Many retirees don't know they can use a government scheme to draw on the equity in their own home to boost their income. It's called the Home Equity Access Scheme (previously known as the Pension Loans Scheme or PLS).
The Home Equity Access Scheme has been undergoing significant changes over the past few years:
- From 1 July 2019, the Pension Loans Scheme was opened to all property owning Australians of pension age.
- From 1 January 2020, the Pension Loan Scheme's interest rate was dropped from 5.25% to 4.5% per annum after organisations, such as National Seniors Australia, pointed out inconsistencies between the scheme's rate and record low interest rates.
- From 1 January 2022, the scheme was rebranded from Pension Loans Scheme to Home Equity Access Scheme and the interest rate was dropped from 4.5% to 3.95% per annum.
These changes are the result of National Seniors Australia's ongoing advocacy. But there is still more to be done.
With your help, we will advocate for a dedicated 'home care' scheme to allow older Australians to stay in their home rather than residential care.
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Most people own their own home and want to stay in their own home as they age but many don’t have access to additional income – they are asset rich and cash poor.
The Home Equity Access Scheme provides a relatively safe way to generate additional income using home equity.
It could be used to:
- Top up existing income from the pension, investments and employment to provide a more comfortable lifestyle in retirement
- Meet income shortfalls during extraordinary events, such as a financial crisis
- Fund health care services including ongoing home or residential care services, or
- Assist family members in financial hardship.
Historically, there has been low take up of the scheme because the interest rate was not competitive and the scheme was poorly promoted.
The interest rate was as high as 5.25% for many years before being dropped to 4.5% from January 2020. Yet this rate was still well above commercial interest rates and likely unattractive to retirees. That is why we welcomed Minister Ruston's announcement on 15 December 2021 that changes would be made to the Home Equity Access Scheme, including a substantial drop in the interest rate from 4.5% to 3.95%.
National Seniors believes this will improve take-up of the scheme, allowing more homeowners to tap into their equity and have a higher standard of living.
The rebranding of the scheme from Pension Loans Scheme to the Home Equity Access Scheme will help increase awareness and encourage all eligible older Australians (not just pensioners) to take advantage of it.
Under the scheme, the government uses the equity in a person’s home to pay them this fortnightly payment. The government recovers the loan and interest from their estate.
Unlike reverse mortgages, the Home Equity Access Scheme cannot be taken as a lump sum. It is only paid on a fortnightly basis.
The maximum amount available via the Home Equity Access Scheme is 150% of the maximum pension rate. As at 14 July 2020, the maximum amount payable was $2,135.40 per fortnight for a couple and $1,416.45 for a single. However, a retiree can choose to withdraw a smaller amount, can stop or start payments at any time, and can pay back the loan at any time.
The government charges a compound interest of 3.95% on the loan amount (from 1 January 2022).
Importantly, Home Equity Access Scheme payments do not count towards the pension income test or affect the aged care means test. Amounts received from a Home Equity Access Scheme loan are also non-taxable.
Bob and Alison Mayer* are 87 and 84 respectively. They are on a full Age Pension. They own their own home outright. It’s an older home on a large block and has been recently valued at $780,000. Their combined Age Pension income is currently $1,458.60 per fortnight ($37,923.60 per year).
Alison has dementia and receives a Level four package with a dementia supplement. Bob provides Alison’s care needs together with the support of 11 hours per week from a provider.
Alison’s care needs have increased significantly, and Bob is both exhausted and stressed. The children have suggested it is now time he looked at residential care for Alison. Bob is adamant he wants them to remain at home for as long as possible.
Bob decides to draw down $16,000 per annum ($615.38 per fortnight) to cover the additional costs of private care by topping up their government funded care package.
The arrangement also provides more personal care hours than in an aged care home (4 hours per day compared to an average of less than 3 in a residential care home).
Over 5 years, Bob and Alison would build up a loan of $89,115 (including compound interest of $8,616).
If the Home Equity Access Scheme rate went down to 3.25%, the interest over 5 years would only be $7,717.
John and Vera Hunt* are 75 and 69 respectively. They are self-funded retirees who own their own home outright. The home has been recently valued at $900,000. Their regular income from their investments is $2,820 per fortnight ($73,320 per year), however the recent hit to the share market means their income is greatly diminished, at least in the short term.
On top of this they both have long-term health conditions and private health insurance which add to their living costs. They also have a daughter who has recently lost her job and is struggling with mortgage repayments. John and Vera want to meet their health care costs, help their daughter and still have a quality retirement.
They decide to draw down $500.00 per fortnight ($13,000 per annum) to cover some of their private health costs and give their daughter help with her mortgage.
If they did this for 5 years, John and Vera would build up a loan of approximately $72,521 (including compound interest of $7,021). [If their home grew in value at 3 per cent p.a. after 5 years, they'd have net equity in their home of approximately $966,000].
If the Home Equity Access Scheme rate went down to 3.25% the interest payable over 5 years would only be $6,400.
If their investment income went up, they might want to reduce their Home Equity Access Scheme payment. They could also choose to stop the payment altogether if their situation changes.
Conversely, if they needed more income, they could increase their payment up to the maximum amount of 150 per cent of the pension.
This would ultimately affect the final amount they would owe in the future. They would need to think about this carefully and factor in the additional interest charged over the life of the loan until the estate was settled.
*Not their real names.
Improving the Home Equity Access Scheme is a simple way that government can use the current low interest rate environment to help older Australians unlock equity in their home and fund a better retirement.
Sign up to the Fairness in Retirement Income campaign or show your support by becoming a National Seniors member.