Question 1. I am asset rich and cash poor. I own my own house and live on a superannuation pension. Are there any loan options using the house as security, apart from a reverse mortgage. I don’t like compounding interest.
As well as your super pension, are you also eligible for the age pension? This is, of course, a valuable part of most individuals’ cash flow in retirement once they attain age pension age.
When you state you don’t like ‘compounding interest’, well, that’s all loans. Perhaps you mean compounding interest where you don’t make any repayments, such as reverse mortgages, so the compounding happens faster.
But it’s important to recognise you can make repayments at any time with reverse mortgages, it’s just that you do not have to.
Then again, you are asking about a loan because you have cash-flow issues, so do you really want to make repayments?
The fundamental question you need to ask yourself is, do you want to have a higher cash flow, with a trade-off being less equity (value) in your home?
If the answer is yes, then you can either sell your home, buy a cheaper one, and have the leftover money to spend.
Or you can apply for a reverse mortgage, where the lender will provide you a lump sum and/or regular payments and a loan will be created against your property.
With reverse mortgages, most providers allow you to provide less than 100 per cent security over the loan.
For example, if you wanted to always retain at least 50 per cent equity in your home to be able to pass onto your beneficiaries, then you could nominate this and the maximum loan you can apply for will be adjusted accordingly.
This is the case for Centrelink’s version of a reverse mortgage, called the Home Equity Access Scheme, which I have written about recently.
As this is a big financial decision, I would recommend seeking personalised financial advice.
Question 2. I am retired and wish to apply for an age pension. I own my house, no longer work, own an investment property that has a large loan attached, so payments are high. I am living on my savings. I believe the loan payments will be considered when assessing my case.
The loan repayments themselves are not considered when assessing your entitlements for the age pension, only your income and assets.
Your principal home is exempted and not counted as an asset.
With your investment property, it’s more complicated.
If you have used the investment property as security on the loan, then the loan can reduce the amount that is counted under the asset test. i.e Centrelink will count only the ‘net’ value – property value less outstanding loan. This is also sometimes called the ‘equity’ in your property. As an example, if your investment property is worth $600,000 and the loan $400,000, then the net value counted is $200,000.
However, if your principal residence has been used as security, and because that’s an ‘exempt asset’, it cannot be used to reduce the asset value of any assessable asset, such as an investment property. Under this scenario, the full value of your investment property would be assessed under the asset test. As per the previous example, the full $600,000 would be counted.
If a loan is secured against both an exempt asset (e.g. principal home) and an assessable asset (e.g. investment property), the amount of the loan is apportioned between the assets in proportion to the asset values as follows:
(Value of the loan × value of the assessable assets) ÷ value of all assets
As an example:
Jenny has a loan of $400,000 secured against her investment property and principal home. The value of the investment property is $600,000 and the value of the principal home is $700,000.
($400,000 × $600,000) ÷ $1,300,000 = $184,315
This means the net asset value of the investment property for Centrelink is $415,385 ($600,000 – $184,315).
Under the income test, it doesn’t matter what security has been used.
Centrelink will use ‘net’ income. Net income is gross income from rent less allowable expenses, which would include your loan repayments. Centrelink will determine this based on information from your tax return.
Question 3. I am 65 years old and working full-time, preventing my 66-year-old stay-at-home husband from claiming any government benefit or pension. Can you advise, if I gave up full-time work, could he then claim an age pension? If he receives an age pension, am I able to work limited hours per week without it affecting his pension payment. Thank you.
Assuming you are income-tested, rather than asset-tested, then if your income reduces, your husband’s age pension will increase (or he may become eligible).
For couples where at least one member is of age pension age, Centrelink will combine all of your assets and income together to make an assessment.
Couples assessed under the income test can earn $336 per fortnight (as at December 2022) before any reduction in the age pension.
For each dollar earned over this, the age pension is reduced by $0.25 for the person. Once you earn $3431 a fortnight, the age pension reduces to nil.
Note that if it was the age pensioner who was working, their income is treated more concessionally under what is called the ‘work bonus’.
Under the work bonus, the first $300 of employment income (and self-employment income) is excluded from the pension income test each fortnight. This is on top of the normal $336 a fortnight income-free area.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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