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Equity release an option for retirement income
There is an estimated $1 trillion in ‘untapped’ home equity, according to retirement funding provider Household Capital, offering retirees an alternative way to fund their retirement.
The organisation said much of a retiree’s wealth was locked up in their property, meaning they were reliant on limited savings in their super to fund retirement.
According to research by Roy Morgan, the average gross wealth of intending retirees was $299,000 but when a property was included, the total rose to nearer $1 million.
Household Capital chief executive, Josh Funder, suggested releasing this equity from a property was a way retirees could boost their savings.
“Most Australians have done a great job paying off their mortgage and effectively ‘saving’ in their family home. In fact, there’s nearly $1 trillion in untapped home equity owned by Australian retirees.”
Equity release was a common measure in the UK and Canada but uncommon in Australia as it was seen as last-resort financing for older Australians, was used to fund inappropriate spending for potentially distressed borrowers and was never linked to long-term financial planning.
But Funder believed this property wealth was a ‘valuable resource’ and should be considered by financial planners as part of a retirees’ financial plan.
“Given that most retirees wish to stay in their own home as they age, this untapped savings is a valuable resource that could be used to improve retirement funding.
“For this model to successfully meet long-term retirement needs, there should be focus on transferring home equity to appreciating assets, such as superannuation. This way, retired Australians will achieve retirement funding adequacy and not be solely reliant on the government’s Age Pension to fund their retirement.”
AUTHOR
Laura Dew
Laura Dew is editor at Super Review. Prior to joining SR, she spent five years working at Investment Week in the UK covering asset and wealth management.
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It seems this reverse mortgage concept is based upon putting a lump sum into super, and presuming the return on super will always be greater than 6% - the same cost of the reverse mortgage, that capitalises the interest over time.
Accessing equity will be enhanced with the revamped Pension Loan Scheme (PLS) from 1st July.
A self funded retiree couple can access up to $2,054 per fortnight ($54,000 per annum) to supplement their income at an interest rate of 5.25%, rather than a lump sum at 6.0%.
Lump sums can also further reduce age pension entitlements.