Equity Release - A Starter's Guide
What is it?
Equity release plans (reverse mortgages) are loans that have been designed specifically for senior borrowers. These facilities allow people over 63 to convert the equity in their property into cash for any worthwhile purpose. No income is required to qualify. Although interest is charged like any loan, the borrower is not required to make repayments (although they can usually make voluntary payments if they wish).
How does it work?
As with most conventional mortgages, the loan is secured by first registered mortgage over the borrower's home. The amount that can be released is determined by age and the value of the security property (see next page for details). Crucially however, the borrower retains full ownership and is able to stay in their home as long as they want. The interest is 'capitalised' -charged back to the loan account - and will compound over time ie; the balance of the loan will increase unless voluntary payments are made.
The debt, including all interest owed, is repaid to the lender when:
- The borrower sells the property of their own accord, OR
- The borrower moves into aged care (not required with some lenders), OR
- The last surviving borrower dies
How can I take the funds?
These loan products are becoming more flexible and increasingly sophisticated as the market develops. At the moment the borrower can take the funds either as:
- a lump sum
- a regular income stream
- or a combination of both
Lenders also offer a range of different interest rate options.
However the most common are:
- Variable
- Capped variable
- Fixed term-defined eg; 1 year, 2 years etc.
- Fixed for life
What is SEQUAL?
SEQUAL stands for "Senior Australian's Equity Release Association of Lenders". This an industry body that oversees the responsible provision of these facilities to the public.
SEQUAL lenders abide by a strict code of conduct that includes mandatory independent legal advice for all borrowers and a "No Negative Equity Guarantee".
Seniors First ONLY uses SEQUAL accredited lenders.
For more info check out: www.sequal.com.au and www.fbaa.com.au
What is a "No Negative Equity Guarantee"?
All SEQUAL lenders give a guarantee that should the debt grow to such level over time that it exceeds the value of the security property realised at sale, then neither the borrower, nor beneficiaries of the estate, can be pursued for this shortfall after the sale has been concluded (as long as the borrower is not in default of the loan contract). Put simply, if the sale of the security property is not enough to cover the debt, the lender wears the loss.
In addition, the lender cannot force the borrower from the property if they think the debt may have grown to a level where a shortfall may occur.
While the presence of these guarantees with SEQUAL lenders give borrowers greater peace of mind, a recent Choice report suggests there may be some variation in the quality of these undertakings between the lenders.
For more info check out: www.choice.com.au
Will it affect my pension?
It is possible in many cases to structure your equity release plan so that it does not reduce the amount of pension income you currently receive. However, the outcome will depend on your individual circumstance and Seniors First is not permitted to advise you in this regard. ALL borrowers in receipt of government pension are directed to speak with a Financial Information Services officer at a Centrelink office before lodging an application.
Will I have any equity left to leave to the kids?
Some lenders offer an option called 'Protected Equity', which guarantees that a requested proportion of equity is preserved for beneficiaries (it also means you can't borrow as much). If you choose a loan without protected equity, then the amount of equity you will have left will be determined by the following factors:
- The term of the loan/how long you live
- Interest rate movements
- Growth rates in the value of your property
Although the interest will accumulate and compound, based on past trends your property should also increase in value over time, offsetting the increasing loan balance.
How much can I borrow?
Most of the lenders have quite similar criteria for determining how much you can borrow. Once the current market value of your property has been estimated by an independent valuation (appointed by the lender), a maximum percentage called the loan-to-value-ratio (LVR) is applied to that value based on the applicant's age.
The general rule of thumb is: the older you are the more you can borrow. Most lenders increase this ratio by 1% with each year lived. In cases where there are two applicants (eg; husband and wife), the maximum amount you can borrow is always based on the age of the youngest borrower. A summary table illustrating these lending parameters is below.
| Age | 60 | 63 | 70 | 75 | 80 | 85 | 90 | 95 |
| LVR | n/a | 15% | 20% | 30% | 35% | 40% | 45% | 50% |
Example: Bob is 74 and his wife Jane is 72, and both are in receipt of the full government pension. They've decided they want to buy a new car and take a holiday. If possible, they also want an on-going, additional income that won't reduce their pension.
Although they bought their home 30 years ago for $60,000, they've done well and it's now worth $500,000. Based on Jane's age of 72, they can now access a maximum of 24% of its current value which means they can borrow a total of $120,000.
After checking with Centrelink, Bob and Jane decide to take $55,000 upfront as a lump sum, and the remaining $65,000 as an income stream over 10 years. This will allow them to buy the car, take the holiday AND give them an extra $541 per month, tax-free.
What will happen to my equity?
An important part of the loan inquiry process is to estimate how a reverse mortgage may affect your equity position over time. Of course, it is impossible to predict with absolute certainty what will happen in the future.
However, based on historical trends in Australian property values and current interest rates, loan calculators can illustrate the likely effect of a reverse mortgage on your property's equity.
In the interests of transparency and objectivity, we recommend the calculator provided by the consumer arm of ASIC. To access, click on the button below. Please note: you will be asked to open or save an excel spreadsheet. If you have Microsoft Excel already installed on your computer, we recommend you save the file to your desktop and open from there. If not, then select open from the dialogue box that will appear on your screen after clicking on the calculator button below.
Enquiring on behalf of mum and dad?
If you're researching the web for your parents you're probably already aware how equity release loans work. You may not realise however the impact these facilities can have on the quality of life your parents enjoy. Although this finance can provide for material wants and needs, time and again we've noticed significant improvements in the emotional well-being of our senior borrowers. Indeed, in many cases the purchases they subsequently make become secondary to the intangible benefits:
- A greater sense of freedom
- Peace of mind - no more worries about money
- Improved lifestyle
- Ability to socialise with friends and family more readily
Our customers often tell us it's the little things that make a big difference in retirement.
We hope you use Seniors First to assist with your search for parent's finance, but in any event we offer you the following tips: if you're managing the application process on behalf of pensioners, be sure that they:
- Visit the Financial Information Services (F.I.S) officer at Centrelink to discuss how the facility may be structured to avoid a reduction in pension entitlements
- ONLY use a SEQUAL lender
- Seek independent legal and/or financial advice
- Allow for any other possible future financial needs that may arise
If you have any questions, or you wish to discuss how these facilities can affect equity, feel free to call anytime without obligation.
Debt Free Equity Release
If you're located in Sydney or Melbourne, there is a new alternative to reverse mortgage which you may also wish to consider.
Homesafe, half-owned by Bendigo Bank, offer a 'Debt Free' Equity Release product which is proving popular with seniors and retirees who don't want to go back into debt. Under this scheme it's possible to access up to $500,000 extra cash without taking out a conventional loan or reverse mortgage.
Homesafe Debt Free Equity Release is NOT a loan or a reverse mortgage of any kind; so it doesn't expose the equity in your home to compounding interest. Instead, Homesafe effectively purchase a part-share of your property from you; they pay you a cash lump-sum today in return for a capped percentage of your home when it's sold in the future. Importantly, the share you don't sell to Homesafe always remains yours. This means you'll always know where you stand. And you can use the money for anything you like.
- It is not a loan in any way, there is no interest or loan repayments whatsoever.
- It's safe, secure and certain. You're in control at all times.
- You can access any amount between $25,000 and $500,000*.
- Live out your life in your home, or sell when you decide.
- You remain the legal owner of your home.
- Currently available to homeowners in eligible postcode areas of Sydney and Melbourne, 60 years and over.
Seniors First is an accredited introducer for Homesafe. For more on how this product works, call to speak with one of our Area Managers or call 1300 745 745.
Where can I get more info?
While we very much look forward to assisting with your enquiry, we also recommend you consult other sources independently to supplement and confirm the information found here. Clicking the links below will spring open an new window containing an external website.