Pensioners get a reduced interest rate on government loan on their home

A scheme that allows retirees to tap into a government loan based on the equity of their own home has had a rebrand and a reduced interest rate for the New Year.

The Pension Loans Scheme is now known as the Home Equity Access Scheme and the interest rate the government charges was reduced on 1 January, 2022, from 4.50% to 3.95% per annum.

The Minister for Families and Social Services, Anne Ruston, said the move aimed to help older Australians tap into their home equity, if they own their own home, to boost their retirement living standards.

“Home ownership is a bedrock of our society with Australians working hard to accumulate wealth in the form of real estate equity,” she said.

“The Home Equity Access Scheme allows Australians over the Age Pension age – whether they are pensioners or self-funded retirees – to unlock this equity using a trusted Government product to boost their disposable income in retirement.”

The rebranded scheme allows older Australians to get a voluntary, non-taxable fortnightly loan from the Federal Government up to a maximum value of 150% of the rate of the Age Pension.

To be eligible for the Home Equity Access Scheme, retirees must have reached Age Pension age, own property in Australia and meet residency and certain other requirements. They do not need to be receiving a pension payment, nor do they necessarily need to be eligible to receive the Age Pension.

The changes build on a package of proposed improvements from 1 July, 2022, introduced into Parliament earlier in December, to allow users of the scheme to access capped lump sum advance payments.

“The lower interest rate, together with the upcoming enhancements, will make the Scheme an attractive option for retirees,” the minister said.

To see what difference the new reduced interest rate will make for the revamped loans scheme, Canstar Research has crunched the numbers. This hypothetical example assumes a single person takes the maximum fortnightly payment allowed of $483 over 20 years and so borrows a total of $251,160. The team also included a comparison of the new scheme with a typical low rate reverse reverse mortgage.

Pension Loans Scheme vs Home Equity Access Scheme

← Mobile/tablet users, scroll sideways to view full table →

Source: www.canstar.com.au – 16/12/2021. Pension Loan Scheme/Home Equity Access calculations assume 50% of the Age Pension rate (the full Age Pension including supplements) rounded down to the nearest whole dollar is drawn down fortnightly, with interest charged fortnightly. Pension Loans Scheme calculations assume a single is receiving the full aged pension of $967.50 and chooses to access the maximum payment as a loan of 50% of this amount. Reverse mortgage calculations use the lowest rate from a sample of reverse mortgages on the market, with draw downs occurring monthly, and interest charged monthly.

The changes to the scheme were welcomed by Paul Rogan, founder and CEO of Pension Boost, a company that helps people tap into the Pension Loans Scheme. The company had been petitioning the Federal Government for a reduction in the interest rate.

Mr Rogan said the new reduced rate should make the rebranded scheme a more attractive reverse-mortgage facility for seniors.

“Based on our discussions with clients, the fact the Scheme is provided by the government provides a level of comfort to seniors when comparing their reverse mortgage options,” he said.

While a change to the interest rate will bring costs down for users of the scheme, there can still be risks and long-term financial impacts to using your home’s equity to borrow money, according to ASIC’s Moneysmart website.

“Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you’re signing up for,” Moneysmart recommends.

Compare super funds

Cover image source: Andy Dean Photography/Shutterstock.com