Rising property prices have led many people to look for ways to unlock the increased equity in their homes, so they can enjoy a comfortable lifestyle in their golden years.
For most of us, our homes represent the most significant portion of our wealth. It’s an asset that can’t necessarily be realised quickly. Selling your home might take some time, and in any case, you still need somewhere to live. The truth is, if you’re selling in a rising market, you’re also buying in a rising market.
There are several ways to access the equity in your home, although before proceeding, you should consider your circumstances. Due to the gravity of the decision and the complex financial products available, seeking independent financial advice beforehand is essential. Our experienced specialists can help clarify what this could mean for you now and in the future.
Reverse mortgages
Reverse mortgages are more popular than ever, allowing you to borrow money using the equity in your home as security.
Following the introduction of more robust regulatory requirements, reverse mortgages are now provided by several small bank and non-bank lenders.
The highest amount you can borrow, using your home as security, varies according to your age. At the age of 60, you will likely be able to borrow around 20% of the value of your home. As this amount usually increases as you get older, by 65, you may be able to borrow between 20% to 25%.
The advantage of a reverse mortgage is that while you’re living in your home, you are not required to make any repayments on the loan. The loan, including interest and fees, is repaid when you move out or sell your home. Interest charged on the loan is usually higher than for standard mortgages. Currently, rates average just over 8% to just under 10%.
The Australian Securities and Investments Commission MoneySmart website provides a reverse mortgage calculator to help you decide if it’s the right course of action for you.
A Government scheme
The Federal Government’s Home Equity Access Scheme is a popular alternative to private reverse mortgages products, with the scheme growing by about 60% a year.
The Scheme provides loans to eligible older people, secured against your home. You can choose to receive a lump sum or a fortnightly tax-free payment.
The loan and any associated costs must be repaid to the government, where you can make or stop repayments at any time. If you sell the property, you can repay the loan on settlement or transfer it to another property.
If there’s an outstanding loan after your death, the government will seek repayment from your estate. The current interest rate is 3.95%.
Home reversion
Slightly different to a reverse mortgage, home reversion is an alternate way of accessing the equity in your home while still living in the property.
While there are transaction fees, you don’t pay interest since it is not a loan. The provider pays you a discounted amount for the percentage of the property you sell based on today’s value. When the property is sold, the provider receives the same percentage of the sale price, meaning the more your home increases in value, the more the provider receives.
Other options
Another way of taking advantage of your home's equity is to sell it and buy a smaller one. Downsizing could allow you to clear the mortgage and invest or spend anything left over.
Those aged 55 or older can contribute up to $300,000 (for each spouse) from the sale into your superannuation fund. It’s considered a non-concessional contribution, but it doesn’t count towards the contribution cap.
You could also consider converting your home to a dual occupancy or, if you’re on a large block, subdividing.
Next steps
Contact your local Nexia Adviser now to review available options and confidently enjoy your golden years.
