Accessing your home's equity in retirement takes strategy

Accessing your home's equity in retirement takes strategy. Picture: Shutterstock.
Accessing your home's equity in retirement takes strategy. Picture: Shutterstock.

The government has made it clear that retirees are expected to use the equity in their home if it becomes necessary to bolster their expenditure.

There are two main ways to do this and neither are without challenges.

The first is to downsize, which can be costly and possibly incur a substantial reduction in the age pension - the second is to take out a reverse mortgage.

The benefits of reverse mortgages are that you can stay in your home, avoid the costs of switching properties and maintain your age pension if that is applicable. However, it means that you are stuck with a debt that is increasing as years pass.

But there can be additional traps which until now have not been publicised.

A mortgage broker was recently telling me of the case of a single woman aged 78 with a home worth $1.8 million and who was on the full pension - her only assessable assets were an old car, furniture, and $5000 in the bank.

One of her two children had lost their job and had trouble making the repayments on their $300,000 home loan.

She was looking to take out a reverse mortgage of $320,000 which would pay out the daughter's home loan, and also give her $20,000 towards much-needed expenses for her own home.

She figured it would be better to transfer the money to her daughter now, rather than make her wait until she died, which could be in 20 years or more.

Centrelink allows gifting up to $10,000 per year or $30,000 for 5 years, and any amount over these thresholds then becomes assessable.

The problem with this lady's situation is, of the proposed $300,000 gift, $290,000 would be creating an asset which would be treated by Centrelink as a deprived asset and held for five years. Because the cut-off point for a single pensioner who wants to receive the full pension is $270,500 this would cause a small drop in her pension.

A better strategy for pension purposes would be to borrow $220,000 which would enable her to give the daughter $200,000 and still have money available for improvements on her own home. If the $200,000 was held by the daughter in an offset account, the accruing interest would be greatly reduced and money could be taken out each month for loan repayments.

Yes, she could have given away $240,000 which would still keep under the threshold for a single pensioner, but it's important to consider that today's deeming rates will almost certainly increase in the next five years and this which could mean a loss of some pension for her under the income test.

This scenario highlights what a minefield the Centrelink and reverse mortgage field is and why expert advice should be taken before any major changes are contemplated. It would also be important for her to revise her will to take into account the gift made to one child and not the other.

Noel answers your money questions

Question

I am single, over 75 and totally confused. If one downsizes from the family home while receiving a part pension from Centrelink, does that mean the loss of the pension? Do you have to pay capital gains tax on the sale of the family house? Your expert advice would be much appreciated.

Answer

If the family home is held in your own personal name it is a capital gains tax exempt asset. The family home is not counted under the income or assets test, but money held in the bank is counted.

If we assume you are a single homeowner with $320,000 in assets your pension should be around $819 a fortnight. If you downsized and freed up another $250,000 in cash your assessable assets could rise to $570,000 and your pension would drop to around $69 a fortnight.

If you have money left over from downsizing your home that took your total assets to over $593,000 you would lose the pension altogether. This is why it is important to take advice and do your sums if you are a pensioner and are considering downsizing.

Question

We are considering selling a property and are compiling a list of expenses over the 20 years since purchasing and building the premises.

Can we claim expenses for maintenance to the property? If so what constitutes maintenance? Can we claim gardening expenses such as lawn mowing? We have never rented out the property.

What is the situation with electricity and gas and water rates?

Answer

Julia Hartman of BanTacs says under section 110-25(4) the following can be added to the base cost: interest on money you borrowed to acquire the asset, costs of maintaining, repairing or insuring it, rates and land tax, interest on money you borrowed to refinance or acquire the asset; and interest on any money borrowed to finance the capital expenditure incurred to increase the assets value.

Maintenance could include items like: cleaning materials, lawn mowing or mower fuel, and light bulbs. It would appear electricity and gas and water rates are not included. Readers should note that section 110-25(4) only applies if the property was purchased after August 1991 and the expenses listed above cannot be used to increase a capital loss, only to reduce a capital gain.

Question

Through various takeovers I now hold shares which are listed on the US stock exchange. Over the years I reinvested all dividends and have listed these with ATO. Recently the company made an offer for Odd Lot Sales which I took up. Consequently, I received a cheque for $4000 in US currency. I have not been able to exchange this cheque into Australian currency, though I have tried various banks and had made many phone/email communications. My bank (Westpac) no longer deals with foreign cheques, others require that you are one of their customers for at least six months. The cheque clearly states that it is only valid for six months.

Is there any other avenue for converting this cheque into my account? When I eventually sell the remaining shares held in this company the problem will only become bigger.

Answer 

A Westpac spokesperson says that in 2020, Westpac informed customers it would cease to process foreign currency cheques from 31 May 2021. This change was made in response to changing customer demand, migration to digital payment methods and fewer in-person payment requests. Customers with an ongoing need to receive funds in foreign currencies should instead request payments through an international telegraphic transfer, directly into their Westpac account.

I referred your predicament to the Bank of Queensland where I bank. My manager there is proactive because he owns his branch and is more likely to be attuned to customers needs. He tells me if you open an account with his branch, he could process the cheque for you. It would need to be sent as a bill for collection which means you would need to wait for the proceeds until the cheque has cleared.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au
This story Right and wrong ways for retirees to access home equity first appeared on The Canberra Times.