Last month, the Pension Loan Scheme was essentially rebranded. It is now called the Home Equity Access Scheme (HEAS).
HEAS still provides support in the form of a reverse mortgage type loan paid fortnightly to people who qualify for the Age Pension and own property in Australia.
In addition to the name change, from 1 January 2022, the annual interest rate is reduced from 4.5% to 3.95%.
For people of pension age, this Scheme could be an option to boost retirement income to pay for expenses like home care or aged care.
For now, payments are made each fortnight, however, if the law passes, from 1 July 2022, borrowers will also be able to withdraw lump sum amounts.
In this article, we share the details and a case study written by Challenger which help you see how a HEAS may be applied.
A person must meet the following eligibility criteria to qualify for the HEAS:
Have reached Age Pension age or be the partner of someone who has;
Qualify for Age Pension, Disability Support Pension or Carer Payment;
Not bankrupt or subject to a personal insolvency agreement;
Own property in Australia of sufficient value to secure and repay the loan; and
Have appropriate and adequate insurance covering the property.
A person does not have to receive an income support payment to be eligible as long as they remain qualified for the relevant payment i.e. they qualify but do not receive the payment because of the income or assets test.
Appropriate and adequate insurance is generally described as an insurance policy that covers a property for at least 90% of all the buildings on the property. The person will need to provide a current certificate of insurance for the property used as security for the loan.
The application for the HEAS must be signed by the person and their partner even where the property used as security is solely owned by one person. The person must be present in Australia when the application for the HEAS is made.
Security for the Home Equity Access Scheme
Only real assets owned in Australia can be used as security for the loan.
Real assets are defined as real property (including the principal home) of the person, their partner or the claiming couple.
Commercial property and vacant land can also be used as security. The loan created by the HEAS is secured by a statutory charge over the property the person has provided.
The Department of Human Services will register a charge with the Land Titles Office on the title deed of the property. Any costs incurred for registering the charge are payable by the person providing the property.
If you live in a retirement village
Property within a retirement village can only be used as security if tenure is structured as freehold and the name of the person or their partner is on the title. However, the most common form of tenure within a retirement village is leasehold where the property cannot be used as security. The property provided as security can be changed if the replacement property provides adequate security for the loan. The request to change the secured property must be in writing and signed by the person and their partner.
Maximum loan amount
The maximum loan amount is calculated using a formula that takes into account an “Age component amount”, and the “value of real assets”.
The age component amount is determined by the age of the person applying for the HEAS or their partner. For members of a couple, the age of the younger person determines the age component amount.
The value of real assets is the equity in the property used as security for the loan. The value of real assets is rounded down to the nearest $10,000. For members of a couple, each person’s share of the value of real assets is used to calculate the maximum loan amount.
A person can nominate an amount of equity to exclude from the value of their secured property. This will limit the maximum loan amount created by the HEAS. The nominated amount can be changed at any time in writing.
The maximum loan amount is not fixed and is recalculated every 12 months after the person’s or their partner’s birthday. As the person or their partner gets older, the age component amount increases which will increase the maximum loan amount. If the value of the secured property increases or decreases, the maximum loan amount will increase or decrease respectively.
Fortnightly loan payment
A person can nominate a fortnightly loan payment up to 150% of the maximum rate of Age Pension. The maximum rate of Age Pension includes the Pension Supplement, Energy Supplement and Rent Assistance (where applicable). The nominated fortnightly loan payment can be changed at any time to any amount up to the maximum.
Where a person is receiving the Age Pension, the maximum fortnightly loan payment is reduced by the amount of Age Pension entitlement. If the amount of Age Pension entitlement changes, the maximum fortnightly loan payment will automatically adjust. Where a person is not receiving the Age Pension, the maximum fortnightly loan payment is 1.5 times the maximum rate of Age Pension. If the person starts to receive the Age Pension, the maximum fortnightly loan payment will be reduced by the amount of Age Pension entitlement.
The person will not qualify for the Pensioner Concession Card if no Age Pension entitlement is received as part of the fortnightly amount. The fortnightly loan payments received are not assessable income for tax purposes and are not assessed as income for aged care means testing purposes.
Repayment of the loan
A person can choose to repay all or part of the outstanding loan balance at any time. Repayment of the loan can be made by instalments or by a lump sum.
If the person wants to sell the property provided as security, they will need to repay the outstanding loan balance on the date of settlement or provide another property as security.
If the person dies, the outstanding loan balance will be recovered from their estate immediately after death. Where there is a surviving partner, repayment of the loan can be deferred.
How does the HEAS work?
A case study:
June, age 75, is single, retired and owns her home outright worth $600,000. She has a vacant block of land worth $400,000 and personal contents worth $10,000. She currently receives a fortnightly Age Pension entitlement of $549.
Under the HEAS rules, June nominates to receive 1.5 times of the maximum rate of Age Pension. She currently receives a fortnightly Age Pension entitlement of $549.
$967.50 x 1.5 = $1,451.25
$1,451.25 - $549 = $902.25
June’s maximum fortnightly loan payment will be $902.25.
More information on the HEAS can be found on the Services Australia Website.