Inflation is starting to bite, and people on income support, such as aged pensioners, have not had their benefits adjusted yet. (Income support benefits are indexed to inflation each December and June, but the revised amounts do not commence until the following March and September, respectively). This has many of our clients thinking about how best to cover the rising cost of living.
The Commonwealth Government has long offered a system that allows older people to access equity in their home to supplement their Centrelink benefits. We wrote about what was then called the Pension Loans Scheme in 2021. In May of this year, just before the Federal election, the scheme was renamed and revised.
The program is now called the Home Equity Access Scheme. This week, we thought we would remind you of it as well as bring you up to speed with the changes because, in many situations, the scheme can be very helpful.
Who is the Scheme For?
The scheme is essentially a loan from the Commonwealth to the recipient. In order to qualify for the program, borrowers need to meet the following criteria:
- Be 66 years or older (either you or your partner);
- Own an insured home (or have a partner who owns a home) with at least $20,000 in equity available to be used as security; and
- Not be bankrupt.
If you meet these conditions, then you can access the scheme. Note – you do not have to actually receive income support such as the aged pension to qualify for the scheme. You (or your partner) just need to be of the appropriate age.
How Much Can You Borrow?
How much you can borrow depends on your age and the amount of equity that you are offering. The equity you offer as security is ‘capped’ at no more than 50% of your actual equity in the property. So, if you own a home with no mortgage that is worth $800,000, you can only offer $400,000 as security in this scheme. If you own the same home but already have a mortgage of $100,000, then you have equity in the home of $700,000. You can then only offer 50% of this, or $350,000, as security for this scheme.
Once the amount of security is established, the total amount you can borrow depends on your age. Basically, the older you are, the more you can borrow. If you are a member of a couple, then the relevant age is the age of the younger partner. The total amount that can be borrowed is calculated by doing the following:
- Rounding your security down to the nearest $10,000;
- Dividing the total by $10,000; and then
- Multiplying this figure by the ‘Age Component Amount,’ as per this table:
(of younger partner)
|The age component amount|
|55 or younger||$1,710|
|90 or older||$6,750|
An example might help. Here is one that Centrelink provide:
Sharon is 70 and single. This means her age component is $3,080. The amount she is using as security for her loan is $256,000.
To calculate her limit, we round the security down to the nearest $10,000 making it $250,000. We divide this amount by 10,000, giving us $25. Then we multiply that by her age component of $3,080. Sharon’s maximum lifetime loan is therefore $77,000.
This is the lifetime limit. Once it is set, then the recipient can choose how they want to receive the money. There are two broad options.
One way to receive the money is to take a portion of it each fortnight. If you do this, then you can receive up to 150% of the maximum fortnightly aged payment pension amount. (Remember, you do not have to be receiving the aged pension to qualify. But this figure is used to determine the limit of how much you can receive). You can choose to receive a smaller amount if you like.
Lum Sum Advance Payment/s
As of this year, there is also an alternative to receive part of the loan amount as a lump sum. People can receive up to two lump sums in a year. The amount that can be received is capped at no more than 50% of the maximum annual aged payment pension amount. Lump sum amounts are classed as advance payments.
If you receive some loan money as a lump sum, then the amount you can receive as a fortnightly payment will be reduced. For example, the maximum lump sum is 50% of the annual pension amount. If you receive this, then the amount you can take fortnightly can be no more than 100% of the maximum pension amount, meaning that in total you have received no more than 150% of the total amount.
The Home Equity Access Scheme is a loan. So… you do have to pay interest!
The interest rate is set by the Social Services Minister (currently Bill Shorten). The current rate is 3.95%. This rate was set in 2021, so it can be expected to increase as interest rates in general increase.
The interest does not need to be paid periodically. You can add it to the amount that you borrow.
No Negative Equity Guarantee
The rules for equity access are such that much less than 50% of the actual equity can be borrowed. This is because a person can only offer 50% of their equity as security, and then the Commonwealth will only offer a portion of that as the loan, with the portion rising with the borrower’s age.
Nevertheless, the system does offer users a no negative equity guarantee. This means that the total debt can never be more than the market value of the property. If the market value does fall below the level of the debt, then the Commonwealth would only take the market value of the property. Any remaining loan amount would be ‘written off.’
How to Get Started
The simplest way to get started is to give us a call! We can make sure that the scheme fits your needs and then help you with each step of the way.