The 2018 Federal Budget proposed changes to expand the Pension Loans Scheme so it could be accessed by a far greater number of people. The changes came into effect on 1 July, 2019. But what is the scheme and how does it work?
What is the Pension Loans Scheme?
The Pension Loans Scheme (PLS) is a program designed to help asset-rich, cash-poor pensioners receive extra income. Given there are a number of older Australians who own their own homes, but do not necessarily have large reserves of cash on hand, the Department of Human Services offers the PLS to help pensioners get a non-taxable supplement to their retirement income via a loan secured against their home or other real estate such as a holiday house.
If you receive a pension you can apply to take out a loan under the scheme, using your home or other property as security. The loan would be paid to you fortnightly as a supplement to the pension, and must be paid back once the property is sold or the owner dies.
Under the changes to the PLS in 2019, the amount that eligible pensioners can borrow has increased to a maximum of 150% of the fortnightly Age Pension rate, meaning full pensioners can potentially borrow an additional 50% of the pension. The scheme was also expanded to include self-funded retirees, who were not previously eligible.
Who is eligible and how do I access the scheme?
To be eligible for the scheme, the government says you need to:
- be of the Age Pension age (either you or your partner)
- receive or be eligible to receive a qualifying pension
- own Australian real estate that can be used as security for the loan
- have adequate and appropriate insurance covering the real estate
- not be bankrupt or subject to a personal insolvency agreement
Payments that qualify include:
- Age pension
- Bereavement Allowance
- Carer Payment
- Disability Support Pension
- Widow B Pension
- Wife Pension (note this pension was discontinued from 20 March 2020)
If you meet these conditions, you may be able to use your property as security for a PLS loan. Each fortnight you may be paid a fixed amount or a percentage of your maximum pension rate. This may continue for as long or as short a period as you like. The exact amount you can receive will depend on your age and the equity you own in your property. You can submit an application for the Scheme on the Department of Human Services website.
The government announced recently that retirees using the scheme would be charged a 4.50% compound interest rate from 1 January, 2020 – down from the previous rate of 5.25%. Repayments would be charged fortnightly until you pay back the loan, with the maximum repayment amount capped at $1,400.10 a fortnight for singles and $2,110.50 for couples as at the time of writing. The government has clarified these caps are “not linked to the interest rate” under the PLS and will remain unchanged in 2020.
While you can make a repayment at any time, you don’t need to until you sell the property being used as security, or until your death, at which time the full loan amount and interest owed would be recovered from your estate. Keep in mind that the longer you take to repay the loan, the more interest you or your relatives will likely need to pay.
Potential risks to consider
If you are retired and own your home but are still struggling to make ends meet, then the Pension Loan Scheme might be worth considering as a supplement to your income. But it’s worthwhile weighing up the potential downsides before applying, such as:
- The value of the home used as security for the loan may be reduced, because any amount owing on the loan may be deducted from the sale price.
- An outstanding loan when you die may reduce any inheritance you had intended to pass onto your children.
- Compounding interest adds up. For instance, the government’s website shows a fortnightly loan amount of just $50 ($1,300 per year) would compound to $7,439.41 over five years and $17,109.40 over 10 years including principal and interest amounts (assuming the fortnightly loan amount, former interest rate of 5.25% and property values remained the same).
This article has been updated. Additional reporting by Tim Smith.
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