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. Those who rely solely on the Age Pension receive around $967.50 per fortnight for singles or $1,458.60 for couples.
The Pension Loans Scheme is a voluntary and non-taxable loan that allows senior Australians to borrow money from the government to supplement their retirement income. The scheme provides a relatively safe way to generate additional income using home equity.
On 1 January 2022, the interest rate on the Pension Loans Scheme will be reduced to 3.95 percent per annum. It will also be renamed the Home Equity Access Scheme.
How does the Home Equity Access Scheme work?
The Home Equity Access Scheme is available to full and part age pensioners and self-funded retirees who own property in Australia.
Services Australia administers and distributes the Home Equity Access Scheme, which is effectively a “reverse mortgage.” The extra payments, in addition to any Age Pension entitlement, are accumulated as a debt secured against the person’s real estate, such as the family home or an investment property.
Participants are allowed to remain in their family home and are not required to repay the loan while doing so. When the property used to secure the loan is sold, or when the person dies, the government usually recovers the debt from their estate.
The debt has a current interest rate of 4.5 percent per annum. This rate compounds each fortnight on the outstanding loan balance. The longer you take to repay the loan, the more interest will accumulate. People can leave the scheme at any time and repay the loan.
What can the Home Equity Access Scheme be used for?
The scheme can be used for a variety of things. For example, the scheme can be used to:
- Fund home care services, either privately or to top-and-tail your Home Care Package
- Meet income shortfalls during extraordinary events, such as a financial crisis
- Finance major expenditure items such as cars or renovations
- Top up existing income from the pension, investments, and employment to provide a more comfortable lifestyle
Who can get a loan under the Home Equity Access Scheme?
You must meet all the following requirements to access the scheme. You:
- or your partner are Age Pension age or older
- get or are eligible to get a qualifying pension
- own, or your partner owns, real estate in Australia that you can use as security for the loan
- have adequate and appropriate insurance covering the real estate offered as security
- aren’t bankrupt or subject to a personal insolvency agreement
You can get a loan even if your income and assets mean you wouldn’t normally get one of the qualifying pensions.
You must also agree to the scheme’s terms and conditions in order to obtain a loan. You’ll need your partner’s permission to apply for a loan if you have one. Your partner must agree to the terms and conditions of the application and sign it.
How much can I get under the Home Equity Access Scheme?
The loan payment depends on how much pension you get.
Age Pensioners (or their partners) can top up their pension to receive a total fortnightly pension plus a loan of up to 1.5 times the maximum fortnightly rate of Age Pension. Self-funded retirees are eligible for the full 150 percent. The payments are not taxable and are not subject to the means test for the Age Pension.
You can continue receiving loan payments until your total loan balance, including interest and fees, reaches your maximum loan amount.
What are the costs of the Home Equity Access Scheme?
There are costs to start and exit the loan. The amount you must pay is determined by your circumstances. The government works out the costs based on the type and quantity of properties you use to secure the loan. For example, if you use one property, you will have one set of costs. If you use two properties, you will have two sets of costs.
You can make repayments at any time. You can also wait and pay the amount in full when you sell the property. However, it is important to remember that the longer you have the loan, the more interest you will need to pay.
How can the Home Equity Access Scheme improve access to in-home aged care services?
The scheme can be used to cover the cost of home care services, including private home care services or as a supplement to an existing Home Care Package.
For example, Bob and Jane Smith* are seniors on a full age pension who own their home outright. Their home is valued at $780,000. Their combined Age Pension income is $1,458.60 per fortnight.
Jane lives with dementia and is the recipient of a Home Care Package with a dementia supplement. Jane currently receives 14 hours of care per week from her provider, My Care Solution. My Care Solution also waives the basic daily fee of $11.02 per day, saving Bob and Jane an additional $4,022.30 per year.
Bob has noticed that Jane’s care needs have increased significantly. The children have suggested it is now time to look at residential care for Jane, however Bob is adamant that they will remain at home for as long as possible.
Bob decides to participate in the Home Equity Access Scheme and draw down $16,000 per annum to privately top-and-tail Jane’s Home Care Package. This arrangement provides over 280 additional hours of home care per year for Jane, in addition to the 832 hours already funded through her Home Care Package. Jane now receives more 1-on-1 care hours per day than she would receive in a residential aged care facility.
Over 5 years, Bob and Jane will have drawn down approximately $106,000 including compound interest from the current value of their home.
How can I apply for the Home Equity Access Scheme?
The easiest way for seniors to apply for the Home Equity Access Scheme is to go to a local Centrelink or service centre. You can find your local service centre here.
You can also complete and submit a Pension Loan Scheme application form or apply online. Visit the Services Australia website for more information.
