Is this the best kept investment secret for older Australians?

Advisers are suggesting older Australians can simply borrow money at 4 per cent and put the money in super where long-term returns are closer to 8 per cent. Picture: iStock

It’s been tagged as the “best kept investment secret in Australia’’ – the government’s generous Home Equity Access scheme is now appealing to a wider group than cash-strapped retirees, and investors can boost retirement money by up to $1m through the scheme.

The free kick comes from the government’s super low lending rate of just 3.95 per cent on a scheme where there is effectively universal access for older Australians. In fact, the wealthier the user of the scheme, the more they can borrow.

The Home Equity scheme is the government’s revamped “pension loan scheme” which was originally created to allow income-hungry pensioners to use the equity in their home to improve their retirement income.

However, new rules mean the scheme can now be recommended by financial advisers and the only criteria for access is that the borrower is over 67 and has at least $20,000 equity in their home.

Advisers are suggesting older Australians can simply borrow money at 4 per cent and put the money in super where long-term returns are closer to 8 per cent.

Sam Wylie, an associate professor at Melbourne Business School and founder of the Windlestone Education group, says: “It’s the best kept secret in Australian investing.”

Wylie says older homeowners who used the scheme “can expect to increase their wealth by between $200,000 and $1.2m”. He explains that once investors qualify for the scheme, they need to use it every year throughout their retirement to get the maximum return.

“A lot of people think you have to receive the pension to use the scheme – that is wrong – you just need to meet the criteria,” he says.

Under the terms of the scheme, the amount that can be borrowed annually is linked to the total assets of the borrower and is inflation indexed – that means more can be borrowed with more assets – meanwhile the amount borrowed can increase every year.

The key feature of using the home equity schemes from the government or private operators is that the home is ultimately sold to repay the loan, but Wylie says profits made over the term of any Home Equity Access loan should greatly outweigh the loan expenses.

As we explained in The Australian last December, when new statistics showed applications to the Home Equity scheme were growing by 40 per cent a year: “With some important variations, a homeowner can sell a part of their home to a financial institution in exchange for a regular income. At best, the older Australian picks up a new line of income with a predictable reduction in the future value of their home – at worst the products create new unknowns for cash-strapped retirees who may regret the move.

“Many retirees can be surprised by how quickly the size of a home-equity loan can grow when the debt is compounding over time. In turn, this can lead to the equivalent of ‘sticker shock’ when they realise the change in family wealth at the end of the process.”

Certainly, every financial product has a price – even the home equity access scheme.

Donal Griffin of Legacy Law says: “Using the scheme this way is an aggressive strategy that might sound great at 67 but not so good at 77. Elderly clients may start such a strategy being comfortable with creating a charge over their home but, as they get older, they may feel less comfortable and more concerned that the equity they may need to fund aged care will be reduced. Why not borrow money from your kids? Especially if you gave them money to buy their first property?”