Question 1

My wife and I are in our 70s and rapidly depleting our superannuation funds, so are considering a reverse mortgage.

Any advice would be most appreciated.

When you run down your savings, but own your own home and don’t want to move or downsize, then a reverse mortgage can be a suitable option.

Often it’s suitable for retirees who are asset rich and income poor.

Historically they have not been popular in Australia, but that is slowly changing.

At a high-level, a reverse mortgage allows you to borrow against your home equity to fund retirement without making regular repayments.

Interest compounds over time and the loan is repaid upon either selling the home, moving into care or passing away. This allows you to stay in your home while accessing cash.

Some important considerations include:

• Amount of loan. As you age, you can obtain a larger loan amount based on your home’s value. For instance, if you are in your mid-60s you may be able to borrow 20 per cent of the value of your home. If you are in your mid-70s this may be about 30 per cent. However, just because you can borrow that amount doesn’t mean you should; sometimes a smaller loan is appropriate to reduce interest costs.
• Negative equity protection and protected equity. All new reverse mortgages in Australia should come with a “negative equity guarantee”. This means the loan can never by higher than what your home is worth. Many providers also offer a protection amount. For example, if you wanted to ensure that beneficiaries receive at least 25 per cent of the future sale price of your home, you could take this option, and the lender will reduce the maximum loan you can have.
• Taxation and social security. Payments made from a reverse mortgage are not taxable and do not get assessed by social security. However, if you receive payments and leave the money in an assessable asset, like a bank account, they will then start to be assessed.
• Aged care: Some thought should be given to possible future aged-care needs. You may have less capital available, after you sell your home to access an aged-care home of your choice.
• Estate planning: It’s important you update your will to cover the impact of the reverse mortgage. You should also let future beneficiaries know about the reverse mortgage.
• Financial/legal advice. Given the future impacts, it’s recommended you receive legal and financial advice.

If you do go ahead, you then have a choice of obtaining the reverse mortgage from a retail provider or from the federal Human Services Department, via its Home Equity Access Scheme.

A private provider can potentially lend more and provide large lump sum payments. HEAS provides conservative loans and mainly only income payments (except a small advanced lump sum).

Under HEAS, your combined loan and age pension payment each fortnight can’t be more than 150 per cent (1.5 times) of the full age pension.

HEAS has a current interest rate is 3.95 per cent a year, which is very low compared to the market. If you just need a small income top up, look at this scheme first.

Reverse mortgages are not for everyone, but they do make sense for some people, and they can provide valuable retirement income.

Question 2

I am thinking of moving back to my home country of New Zealand to retire after living in Australia since 1979. I plan to retire at 63 and live off my super until I become eligible for the age pension.

However, I read on the Centrelink site that you need to have lived in Australia for two years prior to applying for the age pension. And there is consideration of where you have lived prior to that.

Does that mean I have to move back to Australia for two years to claim the pension, and then relocate back to NZ? 

I’ve worked all my working life in Australia and none in NZ, and don’t want to retire with no option of a pension.

Most people think the income and assets test is the only criteria for applying for the age pension. But you are correct, there is a “residence” requirement.

To qualify, the following residency requirements must be met:

• In Australia at the time of applying for a payment, and
• An Australian resident for 10 years or more, with at least five years of continued residence.

However, there are some exemptions from the above. The main one being if you are claiming under an international agreement.

Australia has an agreement with 32 other countries, including New Zealand. Given your circumstances you should be able to claim directly from New Zealand.

You can contact Services Australia for the details.

For a list of the countries that have agreements with us, and how it works you can view: Which countries have international social security agreements with Australia – International social security agreements – Services Australia

(I note a significant country missing from this list is the UK).

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.