Ways your home can help fund your retirement

Many Australians enter retirement with a lot of their wealth tied up in their home. Income sources like superannuation and the Age Pension can be helpful, but sometimes they fall short of what you need to secure the lifestyle you want.

One solution is to put your current home on the market and downsize to a smaller one. While this might leave you with more money to spend (or contribute to your super or invest), it necessarily involves a change of address — something you might not be ready to do.

Fortunately, there are ways you might be able to keep your home while also tapping into it to help fund your retirement. We cover them below. 

Using the Home Equity Access Scheme

If you’re an age pensioner or the partner of one, it might be worth looking into the Home Equity Access Scheme (HEAS). This lets older Australians draw down an income by borrowing against the value of their property.

Under the Government-run scheme, you can choose how much to receive (subject to certain limits) and how you’ll receive it (a fortnightly payment, a lump sum payment or a combination of both). While voluntary repayments can be made at any time, you won’t be expected to repay your loan in full until you exit the scheme. 

For many people, this happens when the property is sold and the loan is paid off using the proceeds of the sale (though there is also the option to keep the loan by transferring it to a new property). Otherwise, the funds are typically recovered from the participant’s estate when they pass away.

Of course, the income you receive doesn’t come free. It accrues interest on a fortnightly basis at a rate set by the government, so you’ll need to be mindful of the compounding effect this can have on your balance, particularly if you’ve opted for an advance payment.

That said, the government has provisions in place to protect you in case you find yourself with negative equity. The No Negative Equity Guarantee, as it’s known, prevents the amount you owe from exceeding the market value of your property. So if your loan balance sits at $250,000 and you sell your home for $200,000, you’ll only be expected to pay $200,000.

Taking out a reverse mortgage with your lender

Another option is a reverse mortgage. This is similar to the HEAS, in that you use the equity in your home as security to borrow money, except it’s offered by private lenders. For many people, it’s akin to an advance on the future sale of a property. 

Like the HEAS, you’ll be charged interest on the amount you borrow and this will compound over time. The outstanding balance is usually repaid once you or your estate dispose of your property, but you can make loan repayments at any time prior to that.

There are also safeguards against owing more than the market value of your property. However, these typically apply on reverse mortgages taken out from 18 September 2012. If yours was taken out earlier, you’ll have to look over your contract to find out if negative equity protection is included.

Opting for a home reversion

When you sign up for a home reversion, you’re effectively selling a portion of your home in exchange for a lump sum payment. It’s not a loan, so you won’t be charged interest on the amount you receive. Rather, your home reversion provider will get a share of your capital gains when you sell your home.

To illustrate, say you have a property valued at $500,000 and you agree to sell 10% of its future value to a home reversion provider. If it goes on to fetch a sale price of $700,000 in the future, the home reversion provider will be entitled to $70,000. 

So while many people are drawn to home reversions because they don’t accrue interest, this will need to be weighed against the immediate loss of equity. Home reversions are also generally less regulated than reverse mortgages, so you’ll need to be clear on the conditions (for example, are you entitled to live in your property for the remainder of your life or only for a fixed term?). 

Whether you’re considering one of these options because you need extra funding for day-to-day expenses or to cover the cost of aged care, consider speaking to a financial adviser. They can walk you through the potential benefits and risks of each, as well as how they might affect your Centrelink entitlements.