As a homeowner, there are several ways that you can make full use of the value of your property through what is commonly known as equity release.
in this guide
What is equity release?
Equity is the value of your home less any money still owing on your mortgage, and equity release is a way to tap into those funds. So, for example, if your property is valued at $600,000 and you still owe $300,000 on your mortgage, your home equity is $300,000.
The beauty of home equity release is that it allows you to access some of that equity while you continue to live in your home. It also allows you to use the money for various purposes ranging from renovations to holidays, medical expenses, a new car, and debt consolidation.
A word of caution before releasing equity from your home
All of these have their own merits and potential shortcomings, and everyone’s financial situation is unique. So, before undertaking any equity release, you should ask yourself a few questions.
Can you get the money needed through other options? Government benefits, downsizing, cutting costs or a no interest loan may fill in the gap in your budget.
Would equity release affect your current financial arrangements? If not, make sure to also consider a range of factors, such as your eligibility for the Age Pension, how it will affect your future living costs, including aged care, and how it will financially impact your spouse, partner and children.
What would happen if you lost the money you’re borrowing? If you are borrowing to invest, you will also need to be particularly mindful of what could happen in the advent of you losing some or all of your investment and how that could affect your home equity as a whole.
Have you discussed equity release with a professional? It’s always a good idea to discuss your situation with a representative from your lender or an independent financial adviser. Make sure to check the financial advisers register to find a trusted professional.
Equity release options
Depending on your level of home equity, you can access this value through a range of financial instruments that should be available to you through your lender.
Standard options include a line of credit, a renovation loan, and a mortgage top-up loan.
Options for seniors include:
- The Home Equity Access Scheme.
- A reverse mortgage.
- A home reversion sale.
- An equity release agreement.
The Home Equity Access Scheme
The Home Equity Access Scheme is a federal government initiative that allows eligible Australians Age Pension age or older to receive a non-taxable fortnightly loan, which you can use to supplement current retirement income.
How the Home Equity Access Scheme works
The government provides the loan, which is secured against your home equity. Under the terms of the deal, you can choose how much or what per cent of your equity you want to offer as security. You can also choose the amount you wish to be paid, but it cannot exceed 1.5 times the maximum fortnightly pension rate.
To find out how much you can borrow, use the Home Equity Access Scheme Calculator available on the Services Australia website.
Costs of a Home Equity Access Scheme loan
Once qualified, you’ll need to repay the loan with interest and legal costs. The current interest rate is 3.95%, but this can change along with all other rates. The rate also compounds on the loan balance until the loan amount is repaid in full.
From July 1, 2022, you can get an advance payment (a lump sum), either in addition to, or as a replacement for, fortnightly payments. The rules regarding maximums still apply, however, so taking this option may reduce the amount you receive over the next 12 months, or 26 fortnights.
There are also maximums that you can borrow over time based on your and your partner’s age and how much security you are offering towards the loan.
You can repay the loan at any time, make repayments or stop your loan payments at any time, although you must repay the loan in full when the property is sold.
All loans also have a negative equity guarantee, meaning you or the benefactors of your will won’t have to repay more than the equity in your home in a worst-case scenario.
A reverse mortgage allows you to borrow money using the equity in your home as security for the loan and is only open to those aged 60 and over.
With a reverse mortgage, there are strict limits on the amount you can borrow as a percentage of your home’s value. You can access the amount you are borrowing as either a regular income stream, line of credit, lump sum or a combination of all three.
Home reversion sale
Sharing in the proceeds of your home sale, or ‘home reversion’ lets you sell part of the future value of your property while still living in it. In other words, you receive a lump sum for the sale part while retaining the remaining portion of your home equity.
How a home reversion sale works
There are plenty of terms and conditions, but basically, the lender pays you a reduced amount for the share you sell, and how much you receive will depend on your age.
So, for example, let’s say your home’s current value is $800,000, and you sell a 10% share ($80,000). The provider will offer you a percentage of that value — usually 37% – 78%, depending on your age.
If you sell the property in 10 years’ time for $1.2 million, the provider gets $120,000 for that 10% share, minus any rebates you may receive if you sell the property or die during that 10-year timeframe. There may also be an option to buy back the share that you sold sometime in the future.
Home reversion costs
Since the money is not considered a loan, there’s no interest involved, but you’ll still have to pay transaction fees and whatever your lender may charge for the home valuation. This type of transaction obviously favours the lender, given you’ll be giving up future gains made on the property, not to mention the amount you forgo in the initial transaction, where you’ll be getting less than 80% of the value in a best-case scenario.
Is a home reversion worth it?
Before undertaking such a venture, you should explore all other available options if you desperately need the cash and look at what you could potentially be forgoing on the sale of the property (in the above example of $120,000, it would be north of $40,000).
Equity release agreement
An equity release agreement is another financial instrument where you can sell a proportion of your home’s value for either a lump sum or periodical payments.
How an equity release agreement works
Like the above options, you can remain in your home and pay fees for the portion sold, which is not unlike paying rent. The proportion of your home equity reduces over time to cover the fees, though this should be offset by increased property values, therefore lifting your equity back up.
Equity release agreement costs
You’ll need to discuss this option in detail with a financial planner or your current lender, but what basically happens is that you pay an initial fee and then subsequent fees, which eat into the percentage of your home equity.
Let’s say, for example, your home is valued at $800,000, and you sell 10% of the value for $80,000. The initial fee may be as high as 30% ($24,000), and the provider will take additional amounts of equity every time a payment falls due, which may be every few years, depending on the terms of your agreement. This structure means the property fund or other investment vehicle that purchases the share in the property in the first place eats away at your equity percentage every time a fee comes due.
The equity release agreement ends when you sell the property and the fund realises its share of the property. If you end the agreement prematurely, there may also be hidden fees.
Is an equity release agreement worth it?
Since fees can easily eat away a considerable amount of your home equity or, in a worst-case scenario, devour it completely, his arrangement is fraught with danger. So, an equity release agreement should only be considered when you’ve exhausted other options, especially if you want to leave the property or the majority of the home equity to recipients in your will.