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Centrelink reverse mortgage scheme is just for the wealthy
Reverse mortgages allow home owners to exchange equity in their homes for a loan that is repaid from the proceeds when the home is sold.
Private providers allow the money to be taken as a lump sum or as an income stream; though the vast majority take the money as a lump sum. As there are no repayments the interest on the loan is capitalised.
The debt can blow out over long periods. Care also needs to be taken in case there is any impact on age pension eligibility.
Centrelink and Department of Veterans’ Affairs have a little-known Pension Loan Scheme where those on a part age pension, who own their own home or investment property, can take out a loan that is repaid when the property is sold.
The loan has to be taken as an income stream and is limited to that which, when added to the part-pension, takes them to the maximum pension.
The interest rate is 5.25 per cent and fixed, which is much lower than the variable interest rates charged by reverse mortgage providers.
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But get these: retirees who are poor enough that they are on the full age pension and who own their own homes are unable to boost their income through the government scheme.
Yet, as the think tank, The Australia Institute points out, retirees whose wealth or income makes them ineligible for the full age pension are able to access the scheme.
Even more bizarrely, self-funded retirees who own property can access the scheme if they are ineligible for the age pension under either the income test or the assets test.
If they are ineligible for the age pension under both tests, they cannot access the scheme. As the Australia Institute says, the scheme is available to those retirees who need it the least. There are reasons that retirees may prefer a private provider.
Under the government scheme the amount is capped to the age pension rate. More can be borrowed from a private provider and it can be taken as a lump sum. And, as mentioned, there is a big class of retirees, such as full age pensioners, who can not access the government scheme.
The Australia Institute says the scheme should be made available to everyone of pension age with a loan that would pay a fortnightly income up to the full age pension rate. Expanding the scheme would allow an existing retiree on the full age pension who owned property to potentially double their retirement income, depending on their age and the value of their home.
Similarly, wealthy retirees who are ineligible for the age pension would be able to borrow up to the equivalent of the full age pension.
On the Australia Institute’s numbers, the scheme could be expanded without significant cost to the budget. Any move to expand the scheme would meet with resistance from reverse mortgage providers.