Additional Financial Alternatives to Support Ageing in Place

 

Financial alternatives to support Ageing in Place

 

  • Releasing Home Equity
  • Taking in boarders and lodgers
  • Financial help from the family
  • Moving in with family or friends 

◊  Use of space within the home

◊  Granny Flats

  •  Subdivide and sell surplus land

 

Releasing Home Equity

By Craig Hall, Executive Officer, Media and Communications, National Information Centre on Retirement Investments ( NICRI) Inc

 

Equity Release – What is it?

Many seniors are asset rich and income poor due to a number of reasons. For example, they may have accumulated their wealth in their home and may not have had access to superannuation during their working life. Equity release can provide senior homeowners with a solution to access adequate cash to enhance their overall lifestyle and financial wellbeing.

So what is it? Equity Release is a way seniors can access money (equity) in their home without the requirement to make repayments or fulfil the contract with the provider until a trigger event occurs. (The most common trigger events are the death of the homeowner or the homeowner moving out of the secured property to an aged care facility, for example.). If used appropriately, and with full understanding from the outset, equity release can be a useful tool for certain seniors throughout their retirement years.

Equity Release products now come in various forms, each with potential benefits and pitfalls unique to everyone’s personal situation, needs and objectives. Despite the range of products and expanding options, a few basic issues are applicable to all and need to be considered:

 

Purpose – The sole purpose of accessing the equity in your home should be to cover necessary expenses that cannot be covered by other means. This may be through regular payments to cover day to day living expenses, a lump sum to cover an unexpected cost or a combination of both. It is important to explore all avenues prior to application to determine which option will best meet your needs. Also check to see if other investment funds are available or an unwanted or non-productive asset can be sold.

 

Elder abuse – Be aware of pressure from a third party such as non-dependent children, family friends and neighbours, as often this can result in a detrimental outcome.

For instance, an elderly lady was pressured by her son to borrow the maximum amount available to her and give him the proceeds for a business venture. Unfortunately the son’s business venture failed, which left the elderly lady with a growing debt, therefore reducing her options for accessing equity later in life for other purposes such as aged care. Another issue she faced is that when she advanced money to her son she exceeded the ‘gifting rules’ which meant that her age pension entitlement was reduced. It was clear in this case that while her and her son’s intentions were good, a lack of information and advice has cost her significantly in financial and retirement living terms.

 

Reduction of equity – Regardless of which type of equity release product you choose, the trade-off for accessing a portion of equity now is that you will have a reduction in equity of your home (in percentage terms) at the end. Try to get as many case scenarios as possible when investigating the available products to give you an understanding of what may eventuate down the track with regard to how much equity may be left.

 

Rights – While you may have to meet certain obligations, you also have rights. It is important to understand your rights as a holder of an equity release product. These include your ability to stay in your home until a trigger event occurs, your right to access the status of the loan or facility as well as other relevant information, and your right to be treated fairly and that you have not been led into a facility that was inappropriate.

 

Advice – One of the most important parts of the application process is seeking professional advice. This includes both legal and financial advice. Seeking legal advice ensures you are aware of the various terms and conditions of the contract, including your own obligations. Financial advice shows the potential outcome of using an equity release product, including issues such as any impact on Government Income Support entitlements, the effect of compound interest if applicable, other options that may be explored and optimising cash flow. Your financial advisor should also highlight potential future limitations to life stage events such as aged care. Many of these issues can also be explained by the Department of Human Services, Financial Information Service (FIS) staff and by organisations such as NICRI Inc.

Once it is established that accessing the equity in your home should be considered as a solution to freeing up cash, the next step is to understand the options available.

 

Equity Release – What are the Options?

Equity Release comes in a number of various forms. It can therefore be quite confronting and confusing to understand and to make a decision on which would be the best option for your circumstances.

So let’s look at the various options available that allow seniors to access the equity in their homes:

 

  • Reverse Mortgage

A reverse mortgage is a loan provided where interest and other costs accumulate and repayment is not required until a trigger event (such as death of a spouse) occurs. Providers can lend up to a regulated maximum percentage of the value of the secured property, based on the age of the youngest borrower/homeowner. The proceeds can be taken either as a lump sum, regular payments or a combination of both.

For Government Income Support (GIS) purposes the first $40,000 of the drawn proceeds that remains unspent is assessed after 90 days and any unspent drawn amount above $40,000 is assessed immediately.  

 

  • Shared Sale Proceeds Arrangement

Seniors can enter into a part-sale transaction and receive a lump sum cash payment in exchange for a share of the property’s future value.  The facility is available for eligible property types in certain locations. The amount received is a smaller percentage of the present value of the share being sold because the senior/s retain all ownership rights and responsibilities for the rest of their lives.

Assessment for GIS is the same as reverse mortgages.

 

  • Property Option

Enables access to the future capital growth of the home as an income stream. The homeowner agrees to sell their home to an investor at an agreed value at a future time of their choosing, in exchange for a monthly income from the investor.

It is possible for the homeowner and investor to share in the capital growth of the property, however this reduces the amount of the monthly payments received by the owner. The homeowner retains full ownership of and responsibility for, the property until the eventual sale and change of title takes place. 

Payments received are not assessed as income for GIS.

 

  • Pension Loans Scheme (PLS)

Property owners of age pension age who do not receive a pension, or receive a part pension, can borrow payments up to the full pension against their property. If the debt is secured against an assessable asset, the actual pension payment may increase as the net value of the asset reduces, thus reducing the ‘top up’ or borrowed component.

 

  • Downsizing

Downsizing can free up equity while maintaining full home ownership. This is simply selling the existing home and purchasing a property of lesser value. Any surplus funds are then available for use.  Costs involved include stamp duty, agent’s fees, marketing fees and relocation costs.

As you can see, it can be daunting to not only understand each product but also to make an informed decision to choose the most appropriate for your circumstances.

 

Avoiding potential pitfalls

As with any major decision-making it is important to investigate all the benefits, conditions and potential pitfalls. The following is a list of handy tips for consumers considering equity release to ensure inappropriate decisions are not made.

  • Check if the provider is prudentially regulated and holds an Australian Credit Licence if required.
  • Check with the Department of Human Services (DHS) to see if it will affect your Government Income Support entitlements.
  • Check if the loan is portable in case you wish to move house and retain your reverse mortgage in the future.
  • Seek professional legal and financial advice.
  • Check if you face any penalties or fees should you choose to exit the scheme, whether retaining or selling the property at a time of your choosing.
  • Ask the provider what your obligations are as far as maintenance on the property is concerned.
  • Ensure that, where applicable, regulated consumer protections are being met according to the National Consumer Credit Act 2009, such as offering a ‘No Negative Equity Guarantee’, providing you with a thorough pre- assessment for suitability of the product and providing the appropriate documentation and projections.
  • Ensure that your insurance cover is adequate.
  • Find out what your rights are if something goes wrong or a dispute arises and what external dispute resolution scheme your provider belongs to so you know where to go if you have a problem.
  • Find out what restrictions an equity release product will have on you in the future – for example if you wish to renovate or need to move into aged care.
  • Ask the provider questions about themselves such as how long have they been in business, can they give you any customer feedback and how can you deal with them in the future.

 

While potential problems may arise from accessing the equity in your home, being prudent in investigating and understanding all aspects thoroughly and seeking professional legal and financial advice will provide clarity and peace of mind. 

 

For information on Equity Release products and options, refer to the NICRI booklet ‘Accessing the Equity in Your Home’ which is available by contacting NICRI Toll free on 1800 020110 or via email nicri@nicri.org.au or write to PO Box 1339 Fyshwick ACT 2609.

Craig Hall is the Executive Officer Media and Communications at the National Information Centre on Retirement Investments (NICRI) Inc. with responsibility for media and research. He produces the range of NICRI publications and factsheets covering superannuation, retirement income streams, investments, financial planning, equity release and redundancy for the general public. Before joining NICRI , Craig worked in the investment and finance industry over a period of 13 years. Craig writes a number of articles for senior’s publications and contributes to discussion/consultation papers for Government.

 

 

Taking in boarders and lodgers

This is an option that could improve your financial situation, allowing you to stay in your own home longer.

 

Tenants, lodgers, and boarders are actually quite different from each other, besides the fact that they occupy some portion of your property.

  • A tenant is a person who pays rent and, in return, is granted a right to occupy residential premises, usually (but not always) including a right to exclusive possession of the premises.
  • A boarder shares the landlord’s house, pays rent and receives some services from the landlord, such as cooking and cleaning.
  • A lodger is similar to a boarder, but generally does not receive services from the landlord. 

 

The success of any of the above arrangements is first and foremost finding the right person, or people, to share your home. Then you weigh the many pros and cons, from the fun of having company versus the frustration of losing privacy, to getting help with finances versus having someone else using resources, and in ways, increasing costs.

 

In any of these arrangements, we urge you to have written agreements. Know your rights and obligations, and spell out those of your tenant/ boarder/lodger. Make sure you know if the added income will affect your pension and what the tax implications are.

 

Financial help from family

Most people do not like asking their family for financial help but, if you want to stay in your home and you or your family wants to keep your home for the family inheritance, it may be worth asking if they can help.

 

If you choose this option, make sure you work with a professional financial advisor to determine which payments can be made to you as a gift rather than income that will affect your income or taxes. There is also the option that a family member may want to buy your home, which could be a win-win if they need the investment and you can then live there rent-free.

 

In any event, with any financial arrangement, seek legal advice and develop a written agreement. You do not want to land in a sticky situation with family members, especially in your senior years when you may need their emotional support even more.

 

Moving in with family or friends

 

If you’re considering this option, we will assume you already have a pretty good relationship with the family or friend you are considering sharing a home with. This option is often used by seniors who need extra help, even if only temporarily. It is often cheaper than hiring in-home care, and you might be able to rent out your home for a short while during your stay away. Whether temporary or permanent, it is considered by many to be a way to “age in place”.

 

With this option, you might just be sharing the home by moving into your own bedroom, or you might arrange for more private accommodation by moving into a granny flat in their home. 

 

Using one of the bedrooms in the home

With this option you’re likely to be fully engaged in the everyday hustle and bustle of the household, from using the family kitchen and living spaces to potentially sharing a bathroom.

 

Granny flats

Granny flats, as mentioned previously, are self-contained living units in the home. You would have your own space beyond just a bedroom, including a bathroom, kitchen and living space. The potential for increased privacy is obvious, but still within the structure of the home with potential for daily interaction with the family.

 

Such a move may be really helpful in even a temporary situation when you or someone in your family is ill or frail. Before you make this decision, review the information on our page about “Additional Income Options for Ageing In Place” for more information on Granny Flats and the questions you should be asking, such as: 

 

These questions apply both to you and the people you will be moving in with:

  • How will people feel about any loss of privacy?
  • Will you be able to cope with the noise and activity of children and teenagers? 
  • Will there be a sense of isolation while other family members are at work, school and other activities?
  • What would happen if the family situation changed? – For instance, if a marriage or relationship break-up meant the house had to be sold. 
  • Can you use the kitchen and other areas of the house? Can you call the place your home, or are you to be considered a guest?
  • How would this decision affect you both financially?
  • Will you be expected to babysit?
  • What kinds of help do you expect/need from them, such as transportation and personal care?

 

If this is to be a permanent arrangement…

So, now you may be considering a granny flat, not in your own home as discussed earlier in the section on Ageing in Place, but rather in another’s home.

 

Many seniors are taking advantage of this option by living in a small home or apartment on property that is owned and occupied by another family member or perhaps a friend. Living in a granny flat might be just the right balance between independence and security, not to mention other advantages like having help and family close by. 

 

If you’re considering moving into a granny flat take the time to talk about and agree on how you will live on the same property together.

 

If this is to be a permanent situation, we recommend you ask the following questions:

  • What is the agreement about the yard? Can you keep pets? What are the rules about parking the car?
  • What are your expectations about getting assistance from family members in maintaining your flat? 
  • Do you want an open door policy, or would your needs be better served if you all agreed to call before visiting?
  • Will their homeowners insurance cover your flat? (More than likely it will, but their premiums may increase and it is good to have the discussion now).
  • What is your share of the finances?

 

When moving in with family or friends it is important to address all of these questions and more before you make the arrangement permanent. And, in addition, we encourage you to develop new family rituals surrounding these new living arrangements.

 

Sometimes families are so concerned about respecting privacy that the senior may be left alone more than they want to be. Planning for regular Sunday dinners and family outings will help develop the healthiest balance between privacy and building precious memories.

 

Subdivide and sell surplus land

If you live on a large parcel of land, you might consider subdividing, or remain in the home and sell the remaining portion of the land. This option is most suitable for a property that has two street frontages, corner lots or a property with rear access and sufficient land to satisfy the minimum lot size for subdivision under your local council’s planning and development controls.

 

If your home is in a high-demand area, this could be a great financial option, let alone a way to make the total amount of property you have to maintain smaller.

 

If contemplating this option, check first with your local council regarding zoning controls and policies on subdivision. You will need to lodge a development application with your local council where it will assess and determine the proposal in accordance with any relevant state and council planning and development policies.

 

In fact, we would suggest never considering this option without seeking professional advice to help guide you along the way. Your consultant should be familiar with the costs of subdivision and can help with the due diligence process. 

 

 

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