‘Critically important’: how to handle the family home in retirement

Deciding what to do with your home when you retire can be one of the biggest financial decisions that you’ll make, and there’s no shortage of options.

Depending on your dreams and your financial circumstances more generally, choices can include selling and adding a chunk of the proceeds to your superannuation, sub-letting, downsizing, taking out a reverse mortgage or gifting it to your kids.

The family home is the bedrock of retirement for many people. Credit: Peter Riches

“Home ownership is critically important to retirement outcomes,” says Josh Funder, CEO of Household Capital.

“For the 80 per cent of Baby Boomers who are homeowners, it’s the foundation and bedrock of retirement.

“One important thing a home does is provide security. Another enormously important thing is that it keeps you in the community where you have a huge number of relationships and providers who can look after you.“

Funder notes that while retirees should consider downsizing, most won’t because they can’t find a new home or apartment in their local community with the quality of space that suits them.

“If they can find the right place locally, most retirees are really savvy in that they value ageing in their community.“

Funder says for those wanting to stay at home, drawing cautiously on their super and using the equity in their home for a reverse mortgage is a “fantastic strategy” that can support them for 25 years between the ages of 65 to 90.

A reverse mortgage is a financial agreement in which a homeowner relinquishes equity in their property in exchange for a loan that provides a lump sum or a regular income stream, without having to make repayments while they live in their home.

The Australian government offers reverse mortgage loans under a Home Equity Access Scheme to people eligible for the age pension at the current interest rate of 3.95 per cent per annum.

Barry Le Brocq, principal of
Melbourne Mortgage Finance, says a reverse mortgage loan balance increases over a period of time, but is not repayable until the owner dies or leaves their home.

“The most common reason for customers seeking reverse mortgage loans these days is because they still have a mortgage when they’ve retired, can no longer afford the repayments and want to pay it off,” he says.

“Some people will pay interest only on the loan as they go, which means the balance of the debt does not increase; in fact, anything they pay stops the debt from increasing as much as it might otherwise.

“When the owner passes away, moves, sells or goes into aged care, the family or beneficiaries have 12 months to repay the debt or refinance it if they want to keep the property, so there’s plenty of time for the family to decide what to do.

“People have to be 60 years of age to be eligible for a reverse mortgage loan, and the amount they can borrow is determined purely by their age.

Iby Ibrahim, advice strategy expert with Aware Super.

“For example, if someone is 60, they can only borrow 20 per cent of the property value, and that goes up by 1 per cent each year. So, when they’re 70, they can borrow 30 per cent of the property value.“

Le Brocq says there are restrictions on what government reverse mortgage loans can be used for, with general consumer purposes such as house repairs, travel, cars and medical procedures qualifying, but not home building or business.

Iby Ibrahim, advice strategy expert with Aware Super, says the family home is a key part of retirement planning and a valuable asset that can help secure a person’s future, but also comes with ongoing costs that need to be managed throughout retirement.

“We know that for many people retirement will last a good 30-40 years, so it’s important to think about the ongoing costs of keeping a home including regular maintenance, repairs and general upkeep,” he says.

“The good news is with more home care services available today, many retirees can stay in their own homes longer – which is what many people want.

“There’s also a financial benefit when it comes to the age pension; your home isn’t counted in Centrelink’s assessment of your assets. This means paying off your mortgage or maintaining your home can actually help with your pension eligibility.“

Ibrahim says some people see their home as their castle and prefer to keep it no matter what, even if it means living on a tighter budget.

“Others might choose to use their home to fund their retirement, perhaps by moving to a smaller property or accessing their home equity through various financial products,” he says.

Planning ahead and seeking advice was crucial to make sure people were on track with their retirement planning, Ibrahim said.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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