The federal government’s reverse mortgage scheme is failing the older Australians it was established to help, according to an advocacy group.
The Pension Loans Scheme (PLS) allows retirees to receive up to 150 per cent of the Age Pension, minus any pension they already receive, as debt against their home. The equity drawdown is repaid after the final retiree living in the house dies. But participants are charged 4.5 per cent interest for the privilege.
That interest rate is too high and needs to be urgently reviewed, according to National Seniors Australia.
National Seniors says the 4.5 per cent rate is a deterrent for asset-rich, cash-poor retirees considering tapping into their home’s equity for income. It wants the rate reviewed and the scheme to include an even lower rate when the funds are used for home care.
The lobby group provided a pre-budget submission to government last month and wrote to superannuation minister Jane Hume and social services minister Anne Ruston in December, Nine reports.
“Unfortunately, while the [scheme] is a good idea, it has been poorly promoted and has an unattractive interest rate,” the National Seniors submission says. “This rate is especially off-putting, given record low interest rates.”
Reserve Bank official interest rates currently sit at 0.1 per cent and are predicted to hold firm for at least a year. The PLS rate was last reduced in December 2019, from 5.25 to 4.5 per cent.
According to RBA figures, the variable housing rate on an owner-occupier home was 3.17 per cent for outstanding loans and 2.85 per cent for new loans in November. Reverse mortgages are higher, averaging between 5 and 5.5 per cent for many lenders.
A spokeswoman for Ms Ruston said improvements had been made to the loans scheme.
“In 2019, we expanded the program to allow maximum rate pensioners and self-funded retirees access to the scheme and increased the amount that can be borrowed,” the spokeswoman said. “[In 2019], we reduced the interest rate to 4.5 per cent, which is below similar commercially available schemes, and committed $9.6 million to improve digital service delivery to make it more simple for retirees to access.”
But these changes have failed to find a market, with the government reporting in March 2020 that the scheme had just 2288 participants and that only 1500 new loans had been approved in the previous nine months. More than 1.8 million age pensioners own their homes.
National Seniors chief executive Professor John McCallum told the Royal Commission into Aged Care Quality and Safety in September that the overwhelming preference of older Australians was to be cared for in their own home, as opposed to an aged care facility.
In line with that, the group also wants the 2021 Budget to include a new “Home Care Loans Scheme” where income from home equity could be used to pay for additional care above the basic amount funded by the government, but at a lower “cost recovery” interest rate than the existing scheme.
“Most view their home as a place to live, not an asset … something they want to pass on to their children even though they may have already paid for their education and helped them buy their first home,” Prof. McCallum told the inquiry.
But former prime minister and superannuation advocate Paul Keating is no fan of the scheme, and would rather see a longevity levy introduced, which would act as an income supplement for those over 80 or 85.
Mr Keating said retirees using more of their home equity to fund their retirement was “eating the house” and left “nothing for the kids”.
Have you had experience with the Pension Loans Scheme? Do you think the interest rate should be reviewed?
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