June 2019 Newsletter
The new, improved Pension Loan Scheme
It feels like only yesterday that we celebrated the new year and here we are almost half way through and at the end of the financial year. As always please feel free to contact me with any questions and in particular anything that needs attending to prior to June 30th. I have already spoken to many of you.
Meanwhile, our latest newsletter looks at an interesting scheme that comes into force next month.
From July 1st 2019, the new Pension Loan Scheme is coming into force.
What is the pension loan scheme?
It means you can borrow money from the government at the rate of currently 5.25% using your home (or another property) as your security and only have to repay that money if you sell your home or the borrower/s pass away.
It is possibly an opportunity for those over 65 who have few assets except for a valuable home. This is especially so if they don’t plan to ever move again to a new home in their life.
The one reason to consider the pension loan scheme carefully is that you have to pay back the loan when you sell your home because you wish to downsize or move into a retirement home or residential aged care.
Another possibility is for those with a second property to receive extra funds for that property before selling the second property later on.
The government has put maximum limits on how much you can borrow but I have analysed those limits and in many cases you can get the maximum for decades or even indefinitely.
What are the rules?
If you are of age pension age you can get up to 150% of the age pension (ie, currently up to $2,094.30 a fortnight) in total funds from the government. The total is comprised of your age pension plus the pension loan scheme.
You are a couple who gets the full pension of $1,396.20. That means you can borrow the difference between $2,094.30 and $1,396.20 a fortnight, which is up to 50% of the age pension or $698.10 extra a fortnight.
You are a single person who gets a part-pension of $300 a fortnight. 150% of the single age pension is $1,389.30 a fortnight. Therefore you can borrow up to $1,089.30 extra on top of your $300 part pension a fortnight.
Would you want to access the pension loan scheme or would you be worried about being stuck in your own home?
The answer is … it depends.
For many people the pension loan scheme will work very well and they will still have substantial equity.
For others it is a way to stay in their own home and have a lifestyle that is substantially better than the aged pension.
It is not for those who may move again and would like to move to a property of equal value or for those who want to keep the full value of the home for their children, but there are many people who can benefit from this well set-up government scheme.
Example 1 revisited:
You are a couple who gets the full pension and live in a property worth $600,000 and the younger one of you is 75 years old. You can borrow $698.10 a fortnight and after 10 years you would owe $171,000, assuming no change in interest rates, but your home, if it went up by 2.5% a year, i.e. just inflation, would be worth $768,000, up from $600,000.
In other words, your equity stake in the home would have gone from $600,000 to $597,000 ($768,000 home value minus $171,000 loan balance) in 10 years’ time.
After 20 years the loan would be $460,000 and the property worth $983,000, leaving equity worth $523,000. You need to keep in mind that, with 2.5% inflation, a dollar in 20 years is only worth 60 cents in today’s money, so the $523,000 would only be worth $300,000 in today’s money.
However, you do not need to borrow the full amount and you do not need to maintain the loan payments at the maximum and a 75 year old person today would be 95 in 20 years and – apologies for being ghoulish – not many couples have both partners survive to age 95 so the pension loan scheme could be a way to supplement their income for quite a few people.
Exactly the same as Example 1, except the home is only worth $300,000 and not $600,000. In that case it is possible to receive the $698.10 a fortnight for 14 years, ending up with equity of $137,702 in 2033 dollars. That is much less but may be very helpful for some people.
I have put together a spreadsheet where one can play through different scenarios. The spreadsheet is mostly for my own use but I’d be happy to pass it on.
You are also very welcome as always to contact me with any questions and in this case we can go through several scenarios over the phone or, if you have a computer or smartphone, via videoconferencing.
AFP LRS Adv. Dip.FS (FP) MBiostats
Life Risk Specialist
SMSF Specialist Advisor
Accredited Aged Care Professional
Accredited Estate Planning Professional
Authorised Representative 308223