What is the home equity access scheme?
Written and accurate as at: Aug 04, 2022 Current Stats & Facts
The cost of living and inflation is making life particularly difficult for retirees. With rising prices unlikely to disappear soon, retirees may need to look for new ways to boost their retirement income. One solution could be the federal government's Home Equity Access Scheme (HEAS).
Although the Pension Loans Scheme (the original name for the HEAS) has been around for over 35 years, few retirees have chosen to take advantage of it, largely due to the restrictive eligibility rules.
The scheme was established in 1985 when the Hawke Government re-introduced an assets test for the Age Pension and other pensions. In the 2018 Federal Budget, the Turnbull Government broadened eligibility for the PLS by allowing full Age Pensioners and more self-funded retirees to participate in the scheme. Additional changes were announced in the May 2021 Federal Budget to boost the appeal and flexibility of the scheme for senior Australians. From 1 July 2022, HEAS borrowers can withdraw lump sums, and a No Negative Equity Guarantee was introduced.
Approximately 1.8 million Australian homeowners receive some age pension, with around 700,000 on a part pension. Many of these part-age pensioners may not know that, along with recipients of the disability support pension, carer payment and some other Centrelink payments, they can access some of the equity in their home through the HEAS.
What is the HEAS?
The HEAS provides a type of reverse mortgage that is aimed at supplementing retirement income.
- Applicants do not have to receive an income support payment to be eligible for the HEAS, so long as they remain eligible for a qualifying payment. For example, they do not need to satisfy the income and assets test.
- It is paid in the form of a regular fortnightly payment from Centrelink. Payments are not taxable.
- The maximum payment is 150% of the maximum payment rate of the eligible pension being received.
- The interest rate is 3.95% per annum, compounding fortnightly. This is significantly lower than the rates charged by most lenders.
- The loan can be secured against your home or investment property.
- A HEAS loan can be partly or fully repaid at any time. Although not required, typically, the loan is only repaid when the property is sold. Therefore, the loan's value increases due to the regular payments made to the pensioner and the growing interest amount.
- The total amount the pensioner can borrow depends on the equity they have in their home, how much of this equity they want to retain, and their age (or the age of the youngest member of a couple).
Pros and cons
One of the obvious advantages of the HEAS is that it provides a supplementary ‘income stream’ or 'lump sum' to support quality of life in retirement.
A disadvantage is that the loan amount increases exponentially over its lifetime. This can significantly decrease the ultimate value of the estate passed to beneficiaries.
The HEAS in action
Des is 67, widowed, and has no children. He owns a home valued at $750,000 and a very comfortable beach house he regularly escapes to, which hasn’t left much in the bank. He is the epitome of “asset rich, cash poor”. He receives a part pension of $250 per fortnight (pf) but he wants to enjoy life a bit more. As the maximum age pension is $967pf Des could receive up to $1,200 extra under the HEAS. This is more than he needs, so he opts for payments of $500pf.
Des maintains the same rate of payment for the next ten years. Over that time he receives a total of $130,000 in additional ‘income’ from the loan. However, his outstanding loan balance after ten years is $164,002. That means he has racked up an interest bill of $34,002. If Des sold the house at this ten-year mark, he would need to repay the full $164,002 from the proceeds.
That may sound like a lot, but if his house was worth $750,000 when he took out the loan, and if it increased in value at a rate of 7% pa over the ten-year period, it could be worth just under $1.5 million.
Taking on any type of debt, particularly later in life, must be approached with knowledge and caution. HEAS loans are subject to several eligibility criteria, and the positives and negatives must be considered.