Government reverse mortgage scheme more attractive than commercial rivals

The only criteria for the government-backed reverse mortgage scheme is to have at least $20,000 of equity in your house.

Financial advisers often call it the best-kept investment secret for older Australians.

It’s the super low rate offered by the government’s reverse mortgage scheme, and in this week’s budget the gift from the federal Treasurer just got better.

Despite strong inflation, the government has left the rate for the Home Equity Access scheme (the former pension loan scheme) unchanged.

In common with the budget decision to not go near the deeming rate which determines access to the pension, it’s a case of no news is good news.

In fact, the terms of the government reverse mortgage scheme are now nothing short of a giveaway.

A reverse mortgage in the commercial market will pay about 8 per cent. But if you go with the government’s increasingly generous scheme the rate is less than half that figure at 3.95 per cent.

And you don’t need to be receiving pension income to access the scheme; you simply must be over 67.

The applications for the home equity access scheme are growing at 40 per cent a year and the decision to leave it alone in the budget will only boost this growth further.

Dr Sam Wylie, Melbourne Business School associate professor who runs the Windlestone Education group, calls it “brilliant”.

“Anyone who owns their own home should consider this scheme,” he says.

The scheme falls under the portfolio of Government Services Minister Bill Shorten. Picture: Martin Ollman

In fact there are advisers out there who make the point that you could take out a loan at 3.95 per cent and then invest it in just about anything and you would be in the money – after all, the RBA cash rate is 4.25 per cent.

Meanwhile, annual returns in super are running close to 8 per cent so you could double your money by simply contributing the money to super and get tax benefits at the same time.

The rate of dividend return on the ASX is about the same as the RBA cash rate – and that gets paid regardless of the direction of the sharemarket.

A reverse mortgage – where the applicant generally sells part of their home to an institution in return for regular income – is not risk free. Home prices may fall in the future.

More commonly, users of such schemes can be surprised as the amount owing on the loan mounts, leaving less scope to pay future costs such as aged care.

Reverse mortgages are a key option for asset-rich, cash-poor Australians who find themselves in a very valuable home with very limited income.

It was only following a range of recent reforms that the government program could be formally recommended by financial advisers. This rule change is another reason why they have been growing in popularity.

The key restriction of the government scheme versus private commercial reverse mortgages is that there are caps; the amount that can be borrowed annually is linked to the total assets of the borrower although it can increase every year.

Nonetheless, the government scheme, which comes under the Minister for Government Services Bill Shorten, is exceptional and open to just about anyone.

The only financial criteria is to have $20,000 equity in the home.