Accessing Home Equity - The Pension Loan Scheme
In 2019, the Federal Government relaxed the rules applying to the Pension Loan Scheme (PLS). The PLS is a Government provided reverse mortgage scheme administered by Centrelink. It can provide a fortnightly, tax-free income stream using your equity in your home or other property.
WHO MAY BE ELIGIBLE?
Some of the eligibility criteria include that you must:
Be of Age Pension age, DVA Service Pension age or the partner of someone who is
Receive or be qualified for the Age Pension or similar social security benefits (even if excluded from the benefit due to exceeding Means Test limits)
Own real estate in Australia of enough value as security (not necessarily a principal residence) – security is provided via a caveat on the title rather than a mortgage
HOW MUCH CAN BE BORROWED?
Up to 150% of the applicable maximum Age Pension benefit i.e. currently
| Current Pension rate ($ / fn) | Maximum Pension ($ p.a.) | 150% Maximum PLS rate ($ p.a.) |
|---|---|---|
| Single ($944.30 / fn) | $24,551.80 | $36,827.70 |
| Couple ($711.80 / fn each) | $18,506.80 | $27,760.20 |
If you already receive some social security benefits, these can be topped up, for a total up to the maximum rates. However, unlike commercial reverse mortgages, lump sum payments are not available.
You can nominate a fortnightly rate and reduce or increase it at any time (subject to maximum limits). Thus, a couple who are excluded from any Age Pension benefits who are “asset rich but income poor” could draw just over $55,000 p.a. under the PLS.
What is the maximum loan?
Fortnightly PLS payments cease if the loan balance reaches the maximum amount (thereafter, interest continues to accrue until the loan is repaid). The maximum limit is based on the value of the security provided and the age of the person (or youngest member of a couple). The age component increases in annual steps e.g.
| Age | Loan-to-value Ratio |
|---|---|
| 55 or under | 17.1% |
| 65 | 25.3% |
| 75 | 37.5 |
| 85 | 55.5% |
The maximum limit (or loan-to-value ratio) is recalculated annually based on your last birthday and may change as interest rates change. The current rate at which Interest accrues is 4.5% p.a.
Prior to the eventual disposal of the secured property, the debt can be fully or partly repaid at any time.
If the loan is secured against an investment property or a holiday home, the debt may be offset against the asset value for means test purposes.
Conclusion
The PLS may provide a flexible opportunity to boost funds available for lifestyle needs, either on a short-term or ongoing basis. For many retirees, this may provide a modest cost option to access part of the capital they have accumulated in their own home or other direct real estate assets.
You can find further information at the Services Australia website. To discuss if this is appropriate for you, talk with one of our advisers.