Rights and wrongs of home equity

Accessing your home's equity in retirement takes strategy

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Accessing your home's equity in retirement takes strategy. Picture: Shutterstock.

Accessing your home's equity in retirement takes strategy. Picture: Shutterstock.

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There are two main ways to use your home equity in retirement, but neither are without challenges.

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The government has made it clear that retirees are expected to use the equity in their home if it becomes necessary to bolster their expenditure.

There are two main ways to do this and neither are without challenges.

The first is to downsize, which can be costly and possibly incur a substantial reduction in the age pension - the second is to take out a reverse mortgage.

The benefits of reverse mortgages are that you can stay in your home, avoid the costs of switching properties and maintain your age pension if that is applicable. However, it means that you are stuck with a debt that is increasing as years pass.

But there can be additional traps which until now have not been publicised.

A mortgage broker was recently telling me of the case of a single woman aged 78 with a home worth $1.8 million and who was on the full pension - her only assessable assets were an old car, furniture, and $5000 in the bank.

One of her two children had lost their job and had trouble making the repayments on their $300,000 home loan.

She was looking to take out a reverse mortgage of $320,000 which would pay out the daughter's home loan, and also give her $20,000 towards much-needed expenses for her own home.

She figured it would be better to transfer the money to her daughter now, rather than make her wait until she died, which could be in 20 years or more.

Centrelink allows gifting up to $10,000 per year or $30,000 for 5 years, and any amount over these thresholds then becomes assessable.

The problem with this lady's situation is, of the proposed $300,000 gift, $290,000 would be creating an asset which would be treated by Centrelink as a deprived asset and held for five years. Because the cut-off point for a single pensioner who wants to receive the full pension is $270,500 this would cause a small drop in her pension.

A better strategy for pension purposes would be to borrow $220,000 which would enable her to give the daughter $200,000 and still have money available for improvements on her own home. If the $200,000 was held by the daughter in an offset account, the accruing interest would be greatly reduced and money could be taken out each month for loan repayments.

Yes, she could have given away $240,000 which would still keep under the threshold for a single pensioner, but it's important to consider that today's deeming rates will almost certainly increase in the next five years and this which could mean a loss of some pension for her under the income test.

This scenario highlights what a minefield the Centrelink and reverse mortgage field is and why expert advice should be taken before any major changes are contemplated. It would also be important for her to revise her will to take into account the gift made to one child and not the other.

Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.

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