Taking out a reverse mortgage on your family home can be a great way to improve your standard of living in retirement by giving you access to some of your home equity in spendable cash.
There are many advantages to a reverse mortgage but also some disadvantages that you need to consider. On the plus side, a reverse mortgage can provide you with either a lump sum payment, a line of credit or even regular weekly top up payments to supplement your pension.
Another advantage of a reverse mortgage is that you don’t need to make any repayments as the loan will be paid out in full when the home is eventually sold.
On the other hand you need to be aware that the interest is compounded and added to the sum of the loan every month and therefore what you owe can increase substantially over time. This can significantly decrease the available equity in your home when you need to sell it and move into aged care.
You’ll also find that the interest rate of a reverse mortgage is a bit higher than that of a regular mortgage.
Reverse Mortgages And The Aged Pension
So does taking out a reverse mortgage on your home affect your age pension? The answer depends on how you take the reverse mortgage and what you use it for.
Generally speaking if you take a lump sum and use it to purchase anything that may be assessable as part of your assets, then yes, it could affect your aged pension. If on the other hand, you use the money to help with daily expenses, then this would not affect your pension.
We’ll try and explain this more simply by talking about each type of loan payment you have the option of taking with a reverse mortgage.
Lump Sum Payments
According to the Centrelink rules, you can draw a lump sum payment of up to $40,000 and this will be exempt from the asset test for a period of ninety days. However it will be subject to the income test until you spend the money. So if the money is in an interest bearing account and earns interest over those 90 days, this will be counted as assessable income and could have an affect on your full pension entitlement.
To explain this further, if you decide to borrow a lump sum of say $60,000 and put it into your bank account, then $40,000 of this amount will be exempt from any pension assessment for up to 90 days. The remaining $20,000 will be considered as income under the Centrelink means test until the money is spent.
Now here is where it becomes interesting. How you spend the money will determine whether your pension is affected or not. If you decide to buy a new car, do some home renovations and take a holiday then only some of this expenditure will be means tested.
The car that you purchase may be seen as an asset and thus this may affect your pension payments. On the other hand, paying for home renovations or repairs or taking a holiday are not means tested and will therefore not affect your pension.
This is basically because the family home is not counted as part of the asset test in relation to your eligibility for the aged pension. Of course, this does depend on the value of your home.
Currently a single person can have assets to the value of $547,000 whereas a couple can have assets valued up to $823,000 without these affecting your eligibility for the aged pension.
You are also able to gift up to $10,000 per financial year to your children without it affecting your age pension as well.
Taking Regular Payments
In most cases drawing regular payments from your reverse mortgage will not affect your pension as they are not counted as income. This is especially true if you spend the money immediately to pay bills or other expenses.
However, if some of the money is allowed to build up in your bank account, then this will be subject to the Centrelink means test. So in simple terms, if the regular draw down payments are spent as they are received and not accumulated, then these will not affect your pension eligibility.
Deciding To Take The Reverse Mortgage As A Line Of Credit
If you decide to take your reverse mortgage as a line of credit, then any amount that you don’t draw on is of course not going to affect your pension. If you draw small amounts on a regular basis, then your pension won’t be affected, especially if you use the money straight away for everyday expenses.
If you however, you decide to draw down a large lump sum, then the above rules regarding lump sum payments will apply.
Speak To A Professional
If you are planning to take out a reverse mortgage on your family home, you should do your research and talk to a professional. A mortgage broker or financial advisor can help you to understand how a reverse mortgage works and even advise you on what your best options would be.
If you’re still not sure about whether your age pension will be affected by taking out a reverse mortgage, it’s definitely a good idea to speak to an advisor at the Department of Human Services who will be able to advise you in more detail.
In summing up, taking your reverse mortgage as regular payments or a line of credit will not affect your pension entitlements. You just need to be careful if you decide to take your reverse mortgage as a lump sum, to not leave the money sitting in a bank account for more than 90 days if you take less than $40,000.
Any amount over $40,000 will of course be included in the income test. When you decide to spend the money, as long as you don’t use it to purchase any assets, it shouldn’t affect your pension.