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Home Equity Access Scheme (HEAS)

The Home Equity Access Scheme (previously Pension Loan Scheme)

On December 15, 2021 the Minister for Families and Social Services, Anne Ruston, announced that the Pension Loans Scheme would be rebranded as the "Home Equity Access Scheme" and that from January 1, 2022 the applicable annual interest rate would reduce from 4.5% to 3.95%.

At the present time, the announcement regarding the new Home Equity Access Scheme (HEAS) appears to be simply a marketing/rebranding exercise, With the new name supposedly adopted so that, "...all retirees, not just those on a pension, know they can benefit from the Scheme if it suits their circumstances.” The only substantial announcement was the announced reduction in interest rates, which is overdue - but bear in mind that current market realities suggest that the next movement will probably be up, rather than down.

The Home Equity Access Scheme (HEAS) in a Nutshell

Eligibility extends to all Australians of Age pension age, including those currently receiving the maximum rate Age pension and those NOT in receipt of any pension.
The maximum HEAS income stream available will effectively be the difference between your current Age pension payment, if any, and 150% of the Age Pension rate.
You must have real property in Australia to provide as security against the loan and only a fortnightly income stream is available - no lump sums are currently available, although changes were announced in the 2021 Budget which would provide for a small lump sum access from 1 July 2022, but these changes are yet to be legislated.
The maximum total loan available is largely a function of your age and the value of your property - less any nominated amount you wish to exclude from the calculation.
The current interest rate applying to these loans is 3.95% , with effect from 1 January, 2022.
Any HEAS loan amounts received are not taxable and do not count in terms of the Age Pension income test.
Independent financial advice prior to commitment is essential; including the modelling of how the debt balance will increase over time.

Eligibility Requirements

Eligibility for the HEAS now extends to all Australians of Age pension age, including those currently receiving the maximum rate Age pensions. Note that this eligibility does not mean, as some media reports have suggested, that everyone aged 65 and above in Australia may be eligible for the scheme. Eligibility for the age pension now commences between age 65.5 and 67.

A frequently asked question is whether an existing mortgage will make you ineligible for the scheme? The answer is that whilst an existing mortgage will not disqualify you absolutely, but the conditions of many existing mortgage contracts will often prevent an additional charge being placed on the property. And, of course, the existence of a mortgage will impact the net value of the property for the purposes of determining the maximum loan available. Regardless, it remains the case that all debt needs to be treated very conservatively, and that is particularly the case in retirement.

Maximum Income Available

The Scheme provides that the maximum income available is equivalent to 150% of the pension applicable in your circumstances - with individual amounts dependent on whether applicants are in receipt of a full or partial pension, or otherwise.

Maximum Borrowing Limits

The maximum loan available will depend on a number of factors:

  • the age of an individual or, for couples, the age of the younger spouse or partner at the time the loan is granted
  • the value of the property being used as security, net of any existing mortgage, and
  • any equity - a "nominated amount" - that the individual wishes to exclude from the calculation, although there is no guarantee that this amount would be excluded when it came to the final recovery of any debt.

The maximum amount available is calculated using the following formula:

Age Component x (Value of real estate equity - Any "Nominated Amount") /10,000

Age Component

The Age Component is based on the age of the individual or the age of the youngest member of a couple.

Age
Age Component
Age
Age Component
<55
1,710
73
3,460
56
1,780
74
3,600
57
1,850
75
3,750
58
1,920
76
3,900
59
2,000
77
4,050
60
2,080
78
4,210
61
2,160
79
4,380
62
2,250
80
4,560
63
2,340
81
4,740
64
2,430
82
4,930
65
2,530
83
5,130
66
2,630
84
5,330
67
2,740
85
5,550
68
2,850
86
5,770
69
2,960
87
6,000
70
3,080
88
6,240
71
3,200
89
6,490
72
3,330
90 and over
6,750

The maximum loan amount is not fixed and is recalculated annually in January or July following the individual's birthday to adjust for the higher Age Component available. But note that while the HEAS payments will stop when the loan reaches the maximum loan amount the loan balance continues to accrue interest on a compound basis until the loan is repaid.

The Cost

The HEAS is effectively a Government run reverse mortgage scheme, where the income withdrawn by the participant accrues over time and is subject to the payment of interest - which is normally paid when the property against which it is secured against is sold. However, it currently does not allow access to lump sums and if that is your focus then a reverse mortgage or home equity scheme will be required and we would again recommend prior professional advice.

The current HEAS interest rate is 4.5% per annum, reducing to 3.95% as mentioned above. Remember that these are variable rate loans and interest rates will almost certainly trend up in the medium/long term.

Example

Provided below is an example appearing in the Budget papers - we have taken those figures and tried to provide some more detail in terms of how they were derived. Note that we have not adjusted the figures to reflect the drop in interest rates mentioned above from 5.25% to 4.5% - the changes generally mean that the debt accrued will not grow as quickly as illustrated, but bear in mind that the interest rates are variable and can change over the period of the facility.

Full rate pensioner couple with $850,000 property

Bob and Sue are a 70 year old maximum rate pensioner couple, with a house valued at $850,000. Their combined Age Pension income is currently $1,368.20 per fortnight ($35,573 per year).

Under the expanded HEAS, Bob and Sue are now able to access some of the value in their home. They choose to receive $2,052 per fortnight ($53,360 per year), the full amount of 150 per cent of the maximum rate of the Age Pension. The value of the income stream increases over time in line with pension indexation.

Over the next 20 years, Bob and Sue receive a HEAS income stream at an interest rate of 5.25 per cent. After 20 years, Bob and Sue sell the house for $1.6 million. While the balance of the HEAS loan owed to the Government has grown to around $900,000, Bob and Sue pay out this balance from the sale proceeds and retain $700,000.

Over the 20 years, Bob and Sue receive around $500,000 in additional income to support their standard of living in retirement.

Analysis

Initially, Bob and Sue would be limited to a maximum loan sum of 3,080 x 850,000/10,000 (Age Component x (Value of real estate equity/10,000)) = $261,800 but this would increase with their age and any increase in value of the property. The property would be (re)valued on a regular basis and the example above presumes a near doubling in value over a 20 year period. The figures above also suggest an assumed compound, annual increase in the value of their property of about 3.25% over the period, with annual cost of living adjustments to the pension of around the same order.

Given the property was valued at the end of the 20 year period, when Bob and Sue were 90, at $1.6 million - they would have a maximum HEAS loan limit of just over $1 million (6490 x 1,600,000/10,000). At that stage that they would have received approximately $500K in HEAS payments, and their total accrued debt over the period would be around $900K - the difference between the two figures being the accrued interest over the 20 year period at 5.25%.

What is interesting is that there may be circumstances where, if there was a prolonged period of stagnant or falling house prices, negative equity could arise - that is to say the value of the loan exceeds the value of the property. Elsewhere, legislation enacted in 2012 provides statutory protection against negative equity on all reverse mortgage contracts. Unfortunately, the Government admitted in the 2021 Budget that the same protection was NOT afforded HEAS borrowers and this would only change from July, 2022. This is highly unsatisfactory and we believe any changes should have retrospective application and need to be discussed specifically with Centrelink..

Further Examples

We have also produced some further examples of how the HEAS might work in practice, available for download.

Summary

Relatively recent changes made to the HEAS/Pension Loan Scheme have been welcome - they provide more flexibility in terms of allowing individuals who are classically "asset rich and income constrained" - and that applies to large swathe of the aged population - to improve their everyday living standards. Many people are also much more comfortable dealing with a government entity than with a private lender. Nevertheless, we strongly recommend that individuals seek independent financial advice before entering these arrangements - they are long-term in nature and can be complex.

 

Please Note

We receive very regular inquiries about the HEAS and will continue to publish more general details, as they become available. Specific advice to individuals can only be provided by a financial planner with a credit license, and professional fees will apply in relation to any advice.
Bear in mind that for some individuals participation in a reverse mortgage scheme, with access to a lump sum, might represent a better fit in their circumstances.

If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.

Please Note: If your circumstances are not complex and don't require paid professional advice then any queries in relation to the HEAS should be made directly to Centrelink.