With around $1 trillion of accumulated value home equity among Australian retirees, you might not realise you’re sitting on the secret to your own genuinely comfortable retirement lifestyle: your own home.
As retirement budgets grow increasingly tighter across Australia, record numbers of seniors are unlocking the equity in their homes*.
This guide takes you through how seniors’ home equity loans work, why you might want one, and the pitfalls to be aware of before accessing the value you’ve worked so hard to build into your home.
A home equity loan gives you access to money based on the value of your home, minus any remaining mortgage on your home.
Home equity loan money can be used for medical expenses, renovations, or to supplement your living costs as you grow older.
You can remain in your home and make your home loan repayments, just like any other mortgage.
There are several ways for seniors to access the equity in their home.
What is home equity?
It might be easier to think of your home equity as how much of your home you actually own. As you’ve been paying off your mortgage over the years, you’ve reduced the amount you owe. If the value of your home has increased as well, then the amount of home equity you have has been building steadily over time.
Your home equity is the current value of your home, minus any mortgage owing on it. ‘Current value’ means the price your home would fetch if you sold it today.
For example, if your home would fetch $800,000 on the market today, and you have a mortgage owing of $50,000, you have $750,000 of home equity.
What is a home equity loan?
A home equity loan is one of the ways you can turn your home equity into cash money. It’s another type of mortgage. Before taking out a home equity loan in your senior years, there are a few important things you should know.
Is a home equity loan the right option for you?
Just like any other home loan, how you use your home equity loan is up to you. A home loan equity loan could be the right option for you if:
You want to access additional funds but you don’t want to sell your home.
You’ve built up a significant amount of equity in your home over your working life - and want to use this hard-won asset to fund your comfortable retirement.
You want - or need - to renovate your home.
How much equity can you borrow?
This depends on the policies of the lender, and these can vary greatly when it comes to senior’s home equity loans. For example, while few lenders allow you to borrow all of your home equity, there are variations in the percent you’re allowed to risk.
Different lenders may also have differing valuations for your home. This will affect the amount you’ll be able to borrow as well.
Most banks insist you retain a set amount of your home’s equity, regardless of why you’re seeking to access your funds. You’ll also need to show your ability to keep up with any loan repayments.
What can a senior’s home equity loan be used for?
There aren’t many restrictions on what you can use your home equity loan for. You might need the money for:
Higher medical costs are unfortunately part and parcel of growing older. Over 60% of Australians over the age of 50 years cited rising unexpected medical costs as their biggest cost of living concern this year**.
It can be comforting to have ready access to funds in order to insulate you from having to beg and borrow at short notice for sudden medical emergencies. It’s one of the major reasons older Australians are looking to access their home equity these days**.
Note: Another smart way to manage rising your health costs can be to upadte your health cover so that it includes more of the rebates you need (like joint replacements perhaps, and physio), and less of the ones you don’t, such as pregnancy cover or kids’ dental. You can find out more about this in our Guide here.
In 2022, Australia had over 68,000 elderly people on the waiting list for home care packages at their approved level^.
Modifying your home - especially if you need to install chair lifts or the like - is one of the most common uses for seniors taking out home equity loans, and it’s being actively encouraged by government agencies via the Home Equity Access Scheme` (see below).
Funding your retirement:
You can also access the equity in your home to fund a more comfortable retirement lifestyle, including travel pursuing your favourite hobbies and interests now that you have some time to yourself.
What are the downsides to getting a seniors home equity loan?
Taking out a home equity loan means increasing your debt, at a time of life when your income may be limited, or decreasing.
Your decision to unlock your home equity could affect your partner, family and anyone you live with. So before making decision to release your home equity as cash, consider how it could impact:
your aged pension.
your ability to afford aged care in the future.
your future living costs, including future medical costs and property maintenance.
Your remaining legacy to leave for your loved ones.
if someone lives with you, whether they will be able to stay in your home when you move out or die.
Paying off your seniors’ home equity loan:
If you’re living on a fixed income (such as the aged pension), your lender will likely ask you to submit a budget. They may also need to know about your superannuation fund, and your partner’s.
They may even require you to take out a life insurance policy. Loan offers may come with a shortened loan term, due to your age. This isn’t necessarily a problem, though it can impact the size of your repayments so it’s wise not to borrow more than you need.
Make sure you have a clear, achievable plan for making your loan repayments before you apply for your loan. Working with a knowledgeable broker is the best way to ensure you’re shoring up your financial position, not setting yourself up for potential hardship down the track.Compare & Save
What if I don’t qualify for a home equity loan?
There are several other ways to turn your home equity into cash money, including:
a reverse mortgage (which is a type of home equity loan)
a home reversion (this is sometimes called a home sale proceeds sharing)
an equity release agreement
the Government's Home Equity Access Scheme (this used to be called the Pension Loans Scheme)
1. What is a reverse mortgage?
This is another type of home equity loan, and is only possible if your home has no existing mortgage at all. Reverse mortgages are also usually reserved for owner occupied properties. Unlike a home equity loan, there are no repayments on a reverse mortgage. The loan monies are repaid when you move out (either on your death or when you enter an aged care facility). There are also options for family buyouts.
2. How does a home reversion work?
This process involves selling a ‘share’ in the future value of your home, while you’re still living in it. You don’t pay interest on a home reversion, but there are transaction fees such as a valuation fee.
Your home is valued at $800,000. You sell a 20% share of the future value. Your provider may offer you $50,000 to buy a share in your home today. When you sell your home, the provider receives 20% of your sale price. So if you - of your estate - sell your home in ten years’ time, for $1,000,000, your provider receives $200,000.
Terms for home reversion agreements can vary widely. It’s definitely something to discuss with your financial advisor before diving in.
3. How does an equity release agreement work?
A property investment fund buys a portion of your home's equity, paying you the cash you need. You don’t pay interest on these funds, but there are significant fees such as:
your application fee.
your periodic service fee (based on a set percentage of the fund’s equity share in your home).
any fee to end the agreement.
The fees can be deducted from the remaining equity in your home. The fund’s periodic fee increases with their increased share of your home equity.
Your home is currently worth $800,000. You sell 20% of your home's equity for $160,000 to the property investment fund. The fund charges an initial fee of $40,000, taking $200,000 of your equity and paying you $160,000.
The property investment fund now owns 25% of your home. Additional amounts of equity are deducted each time your periodic fee falls due (usually every 5 years).
The investment fund’s share of your home's equity increases over time, as yours decreases. The investment fund gets a share of your proceeds when your home is sold. You or your deceased estate receive any remainder.
The risk with this kind of agreement is that your ownership of your home reduces over time if your property’s value doesn’t increase more rapidly than the periodic fees.
4. The Home Equity Access Scheme (HEAS)`:
This government program used to be called the Pension Loans Scheme. It’s run by Services Australia and the Department of Veterans' Affairs.
If you receive the aged pension, and you’re an Australian citizen - and own your own home - you’re able to borrow against the equity in your home and have the money distributed to you as a voluntary non-taxable fortnightly amount.
You can use these funds to supplement your retirement income. You get to choose how much of your home equity to use, and how much money you’d like to receive per payment.
As of July 2022, you’re also able to access a lump sum payment on top of your regular monies, though this may reduce your fortnightly income over time. The amount you can borrow is partly determined by your age, and the age of your partner, if you have one`.
HEAS loans have a negative equity guarantee, protecting you from incurring more debt than your home is worth. Find out more about HEAS here.
The bottom line:
You’ve worked hard to afford your home and add to its value over the years. Now you can access this value to address some of your rising living costs as you approach retirement. Speaking to an expert broker will help you find a home equity loan that suits you and your lifestyle.
To learn more about the broader topic of home loans for seniors you can read our guide.Compare & Save