Alan Hartstein
Athena Cocoves
As a homeowner, there are several ways that you can make full use of the value of your property through equity release.
What is equity release?
Equity release is a way to tap into your home equity — the value of your home minus any money still owed on your mortgage. For example, if you owe $300,000 on your mortgage for a property valued at $600,000, your home equity is $300,000. Equity release would help you access that $300,000.
The beauty of home equity release is that it allows you to access some of that equity while you continue living in your home. You to use the money for various purposes, including renovations, holidays, medical expenses, a new car and debt consolidation.
What to consider before releasing equity
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 the following few questions:
- Can you get the money another way? 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 also to 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 when you lose 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? Discussing your situation with a representative from your lender or an independent financial adviser is always a good idea. Make sure to check the financial advisers’ register to find a trusted professional.
How to release equity from your home
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. Typical options are a line of credit, renovation, and mortgage top-up loans, and standard options for seniors include:
- The Home Equity Access Scheme
- Reverse mortgages
- Home reversion sales
- Equity release agreements.
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 it 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.
How much it costs
Once qualified, you’ll need to repay the loan with interest and legal costs. The current interest rate is 3.95% (at the time of writing), but this can change along with all other rates. The rate also compounds on the loan balance until the loan is repaid in full.
From July 1, 2022, you can get an advance payment (a lump sum) in addition to, or as a replacement for, fortnightly payments. However, the rules regarding maximums still apply. 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. These are based on your and your partner’s age and how much security you offer for the loan.
Is it worth it?
You must repay the loan in full when the property is sold, but you can make or stop loan payments at any time before then.
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.
For more information, visit Services Australia or the Department of Veterans Affairs.
Reverse mortgage
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 it works
There are plenty of terms and conditions, but generally, the lender pays you a reduced amount for the share you sell. 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). Depending on your age, the provider will offer you a percentage of that value — usually 37%-78%.
If you sell the property in 10 years 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 time frame. There may also be an option to buy back the share you sold sometime soon.
How much it costs
Since the money is not considered a loan, there’s no interest involved. You’ll still have to pay transaction fees and whatever your lender may charge for the home valuation. This type of transaction favours the lender since you’ll give up future gains on the property. That’s not to mention the amount you forgo in the initial transaction, where you’ll get less than 80% of the value in a best-case scenario.
Is it worth it?
Before undertaking such a venture, you should explore other available options if you desperately need the cash. Also, look at what you could potentially be forgoing on the property sale. In the above example of $120,000, that loss 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 it 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. However, increased property values may offset this, lifting your equity back up.
How much it costs
Typically, you’ll pay an initial fee and then subsequent fees, which eat into the percentage of your home equity. Though you’ll need to discuss these costs in detail with a financial planner or your current lender
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). Then, the provider will take more additional equity every time a payment falls due. This may be every few years, depending on the terms of your agreement. This structure means the property fund — or another investment vehicle that purchased the share in the property first — will eat 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 it worth it?
This arrangement is fraught with danger. Fees can easily eat away a considerable amount of your home equity — or devour it completely in a worst-case scenario. So, an equity release agreement should only be considered when you’ve exhausted other options. This is especially true if you want to leave the property or the majority of the home equity to recipients in your will.
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