Pension Loan Scheme now easier to access

The Pension Loan Scheme pays a regular fortnightly amount.

Reverse mortgages or related products that allow you to use ­equity accumulated in a residential property have long promised a way forward for asset-rich, cash-poor older Australians.

Though the concept has its merits, one of the problems has been a limited choice of product. The federal government’s Pension Loan Scheme is a well-established, attractively priced product that has recently been ­reviewed to allow a much wider number of potential applicants, including pensioners and anyone running their own self-managed super fund.

A spokesman for the Department of Social Services says: “A person is qualified for the Pension Loans Scheme if they are receiving or are qualified for Age Pension, Disability Support Pension or Carer Payment; have reached Age Pension age; and own real ­estate in Australia that can secure the loan.”

In other words, the new rules mean that if you meet residency requirements, are of age pension age (65-67, depending on date of birth) and own a property in Australia, you may be eligible to borrow money from the government under the PLS even if you cannot get the age pension.

Previously, the PLS was only available to self-funded retirees who were in receipt of either a partial or full age pension or people who were excluded from the age pension because either their assets or incomes were too high.

This is not a way to get a large volume of cash at one time. There is no lump-sum payment available, rather, the PLS pays a regular fortnightly amount that can be up to 150 per cent of the maximum age pension rate. For singles, the maximum PLS payment is $1291 per fortnight and for couples it is $1946 per fortnight.

Private reverse mortgage providers charge 5.5-6.5 per cent interest whereas the government charges 4.5 per cent interest under the PLS. This interest rate was reduced from 5.25 per cent in 2019 after lobbying from seniors advocacy groups. It compounds until the loan is repaid upon death or when the property is sold.

The PLS provides a regular income top-up for those not ready to downsize their property or lifestyle just yet. By getting the money drip fed rather than in a lump sum, the compounding effect of the interest happens on a slower basis, meaning more money left over in the estate when the loan is eventually repaid.

For many self-funded retirees who have seen their portfolios take a 10-20 per cent hit recently and may be facing a cash squeeze, rather than sell down assets at a low point to fund ongoing living expenses, the PLS may be a viable option to supplement cash until investments recover to a more ­acceptable sell point.

The fortnightly payment from the PLS can be varied depending on your requirements and if the PLS is not required any more, payments can easily cease and the loan repaid. Alternatively, if you sell your property, you can transfer the loan from the old property to the new property and continue receiving fortnightly PLS payments.

But be aware that if you apply for the PLS, you are unlikely to be able to also obtain a lump-sum ­reserve mortgage from a private lender.

Similarly, if you already have a mortgage on your property, you are unlikely to get the PLS, but you can get the PLS over an investment property or holiday house. It does not need to be secured against the family home. Some retirement village properties also qualify, but they need to be on a freehold title and not have restrictive terms.

This is a reasonable if limited government backed product, but be aware the PLS is a loan product, and even though ­offered by the government, there is an interest component that compounds if repayments are not made. But like all things, it has its place for some and people are advised to seek ­independent legal and financial advice before applying.

Centrelink also has a section called Financial Information Services, where you can speak with a specialist about whether the PLS is right for you.

James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au