Understanding the home equity access scheme: a financial lifeline for older Australians
As Australians age, many find themselves facing financial challenges in retirement, with limited income from pensions or savings, and rising living costs. For older homeowners, the equity tied up in their homes can be a valuable asset that provides an opportunity to improve financial security. One such scheme designed to help seniors tap into this asset is the Home Equity Access Scheme (HEAS), previously known as the Pension Loan Scheme.
How does the Home Equity Access Scheme work?
Eligibility
To qualify for the Home Equity Access Scheme, applicants must meet several criteria:
- Be aged 67 years or older.
- You are eligible to get a qualifying pension.
- You or your partner own real estate in Australia you can use as security for the loan.
- You or your partner, or any co-owner of the property, aren't bankrupt or subject to a personal insolvency agreement.
- You have adequate and appropriate insurance that covers the real estate offered as security.
- You meet the rules for a qualifying pension but don’t get a payment, for example, your rate is zero because your income or assets are over the threshold.
The property used in the scheme must be the borrower’s principal place of residence. If the home is not owned outright, a portion of the equity will be available depending on how much is still owed on the mortgage.
How much can you borrow?
The amount you can borrow under the Home Equity Access Scheme depends on several factors, including:
- The value of your property.
- Your age, or if you have a younger partner, their age (older applicants can access more funds).
- Your security for the loan.
Unlike a traditional mortgage, the loan under this scheme doesn’t require monthly repayments. Instead, the government provides the money as a loan, and it is repaid when the property is sold, or when the homeowner moves into aged care or passes away. You can choose to take the loan in lump sums or as regular payments, similar to a pension or income stream.
Repayment
You can repay the loan in part or full at any time.
If you sell the property, you can either:
- Transfer the loan to another property including your new home.
- Repay the loan on the date of settlement.
If there’s an outstanding loan after your death, we’ll generally seek repayment from your estate after 14 weeks. We may defer repayment if your surviving partner is both:
- Age Pension age or older.
- Using the real estate used as security, for example, to live in.
Your Home Equity Access Scheme loan includes a no negative equity guarantee. This means when you repay the loan, neither you nor your estate will owe more than the property's market value, after deducting any existing mortgages or other legal claims on the property.
For example, if your loan balance is $250,000 but your property sells for only $200,000 with no other debts attached, you will only need to repay $200,000.
Interest rates
The government sets the interest rates for the scheme, which are lower than most general loans. However, the interest compounds and is charged fortnightly, meaning the longer you have the loan, the more you will owe. You can opt to get your fortnightly repayments at one of these three loan rates:
- The maximum amount which is 150% of the maximum pension rate.
- A smaller percentage.
- A fixed loan amount that you choose.
How funds are provided
Applicants can choose how they receive the funds from the scheme. They can opt for an advanced lump sum payment, regular fortnightly payments, or a combination of both. This provides flexibility to ensure that the funds are used in a way that suits the individual's needs, whether for everyday living expenses or special costs like healthcare or home modifications.
Maximum payment
William receives the maximum Age Pension rate. Under the Home Equity Access Scheme, he can access up to 150% (1.5 times) of this amount. The maximum fortnightly amount is $1,716.60 (calculated as $1,144.40 x 1.5). This total includes both his Age Pension and loan payments.
William requests a fixed loan amount of $600 per fortnight. Combined with his Age Pension of $1,144.40, this equals $1,744.40. However, this exceeds the maximum fortnightly limit of $1,716.60.
As a result, the maximum loan amount William can receive is $572.20 (the fortnightly limit of $1,716.60 minus his Age Pension of $1,144.40).
Partial payment
Joan receives a part Age Pension rate of $300 per fortnight. Under the Home Equity Access Scheme, she can access up to 150% (1.5 times) of the maximum Age Pension rate, which is $1,716.60 per fortnight.
Joan requests a fixed loan amount of $400 per fortnight. Combined with her Age Pension of $300, her total fortnightly payment is $700, which is below the maximum limit. Therefore, Joan can receive the full $400 loan amount she requested, bringing her total fortnightly income to $700.
Percentage of the maximum payment
George receives the Age Pension and opts to receive 50% of the maximum Age Pension rate as his fortnightly loan amount.
50% of $1,144.40 is $572.20. His combined Age Pension and loan payment will always equal at least $572.20. If his Age Pension rate decreases, the loan payment will increase to maintain this fixed percentage.
If George's Age Pension payment increases above $572.20, loan payments will stop until his pension falls below that amount again.
Benefits of the Home Equity Access Scheme
- Supplement retirement income: The primary benefit of the Home Equity Access Scheme is the ability to increase the available income for retirees, particularly those who are struggling to meet expenses. This can help provide peace of mind for seniors who need extra funds for daily living, healthcare, or other retirement costs.
- Stay in your home: One of the most appealing aspects of the scheme is that it allows homeowners to access their home’s equity without needing to sell their property or move. This means you can continue to live in your home for as long as you like, maintaining your independence and avoiding the stress of moving into a smaller home or aged care facility.
- No monthly repayments: Unlike a traditional loan, the Home Equity Access Scheme doesn’t require you to make regular repayments. This can be particularly helpful for retirees who may not have the disposable income to make such payments. Instead, the loan is repaid when the home is sold, which means there’s no immediate financial burden.
- Negative equity guarantee: The Home Equity Access Scheme includes a no negative equity guarantee, which means that you will never owe more than the value of your home. If the property’s value decreases over time or there’s a shortfall in the sale proceeds, you will not be personally liable for the difference. The loan is limited to the value of your home.
- Flexibility: The scheme provides flexibility in how funds are used and received. Whether you need a one-time lump sum or regular payments, the option is there to suit your financial situation.
Drawbacks of the Home Equity Access Scheme
- Interest accumulates: One of the downsides of the Home Equity Access Scheme is that interest compounds over time, which means the amount you owe will increase. This can significantly reduce the value of your home when it is sold and may leave little to pass on to your heirs.
- Impact on inheritance: Since the loan is repaid from the sale of the home, the equity that would have gone to your beneficiaries will be reduced by the amount of the loan and the interest. If leaving a legacy is important to you, this is an important consideration.
- Loan repayment delay: While the loan is repaid when the home is sold or the homeowner passes away, this may not align with your original expectations, particularly if your financial situation changes in the future.
Is the Home Equity Access Scheme right for you?
The Home Equity Access Scheme can be a valuable tool for older Australians who need to supplement their retirement income but wish to remain in their home. It allows you to access the equity in your property without the need for monthly repayments, providing a lifeline for those who may not have sufficient savings or superannuation.
However, as with any financial product, it’s essential to consider the long-term implications of using the scheme, particularly regarding the interest that accumulates and the impact it may have on your estate. Consulting with a financial advisor and seeking guidance on how the Home Equity Access Scheme fits into your broader retirement strategy is highly recommended.
Ultimately, the Home Equity Access Scheme offers older Australians an alternative way to access additional funds for retirement, but it’s important to understand how it works and whether it’s the right choice for your specific needs and goals.
