For many retirees, the family home is a major source of wealth, particularly if you’ve managed to pay down your mortgage in full. Tapping into your home equity can be a smart strategy to improve your quality of life in retirement, or even support your loved ones.
There’s more than one way to access the equity in your home to boost your retirement income, so we’ve broken down the basics of what you need to know to kick start your retirement planning. But first, it’s important to understand what equity actually is, and the benefits and considerations of accessing it.
Equity is the difference between the current market value of your property and the remaining balance on your home loan. For example, if your home is currently worth $800,000 and you owe $150,000 on your mortgage, your equity would be $650,000. That is, if you sold your property today, and paid off the remainder of your loan, you’d have $650,000 in the bank. Nice!
Equity often builds up over time as you reduce your loan amount with repayments, and if the market value of the property increases. As a retiree, you may have lived in your current home for a number of years and either fully or mostly paid down your mortgage, meaning that you’re likely to have built up quite a bit of equity.
What is useable equity?
Usable equity is the equity in your home that you can actually access via your bank (without having to sell your home). Useable equity is calculated as 80% of your property’s current market value, minus what is owed on the mortgage. It is worked out using this formula:
(Value x 0.8) minus the existing loan.
To bring this to life, imagine your home is valued at $400,000 and your mortgage is $100,000, this would be the equation for finding your usable equity:
- $400,000 x 0.8 =$320,000
- Minus $100,000 in existing loans
- Therefore, your useable equity would be $220,000.
You can get an estimate of your current useable home equity using this calculator. It is these funds that you could potentially use in retirement.
Ways to make the most of your equity in retirement
Put simply, downsizing is the process of selling your current home and moving into a smaller property. Downsizing is a common strategy for older people wishing to access the home equity they have built up in the family home over time, to fund their retirement and support their family if they wish.
It can be an emotional decision, but the benefits are compelling for many – downsizing not only has the potential to free up cash to boost your retirement income, but a smaller home may come with many practical benefits as well.
If you’ve been in your existing home for a while, it’s likely to have increased in value. And if you haven’t already paid off your mortgage completely, you may not be far off hitting this milestone. Selling your current home and buying a smaller, cheaper property means you could pay off the remainder of your mortgage (if you still have one), leaving you with cash in your pocket to retire comfortably and mortgage-free. If you’ve come into quite a windfall, you could consider buying an investment property, generating a passive income for yourself.
Downsizing may also have tax benefits, with the Downsizer Contribution Scheme allowing Australians to use the proceeds from the sale of their home to boost their superannuation. If you’re 65 years old or older and meet the eligibility requirements, you can contribute up to $300,000 from the sale of their home into your super. Before making a decision, it’s a good idea to weigh up all your options and consider professional financial advice before deciding what’s best for you and your financial situation.
Further to this, smaller homes may be easier and less costly to maintain, giving you more time and money in retirement to focus on the things you enjoy. You’ll also have the opportunity to choose a new home that will be better suited to your needs as you get older, such as fewer stairs, or a garden that requires less maintenance.
Downsizing may also allow you to move closer to family members and friends, or to a more convenient neighbourhood with close proximity to important amenities or your favourite shops.
On the other hand, downsizing isn’t for everyone. It may not be right for you practically, emotionally, or financially. There are a number of reasons people may not be interested in downsizing, including:
- the cost of selling your current property and purchasing a new home – the cost of selling (agents fees, marketing costs, legal costs) and buying (stamp duty, legal costs) can add up and need to be taken into account when deciding your next move.
- finding a new place to live – you might have particular ideas about the type of property you’d like to downsize into, and you might not find the right one
- the costs associated with moving – moving is considered one of life’s biggest (and sometimes stressful) moments. You’ll also have to think about the costs this involves including removalist fees, cleaners, repairs and reconnecting utilities.
- the emotional ties you have you to your property and possessions – if you’ve spent a number of years creating happy memories it can sometimes be hard to move on. You may also find that your current furniture may not fit into your new, smaller home, which can also be difficult.
- lifestyle changes – moving to a smaller property may involve giving up certain lifestyle factors that you’re used to and enjoy, like the family pool, big backyard and extra space.
In the case that downsizing isn’t for you, there are still options available for you to make the most of your home equity in retirement.
A reverse mortgage allows older homeowners to borrow money from their lender using their home equity as security. A key feature of a reverse mortgage is that you can stay in your home and won’t have to make repayments while living there. Reverse mortgages are typically repaid either when you move out of the home and sell the property or are repaid by your estate when you pass away.
They work by compounding the interest charged on the home loan over time at your interest rate, adding to the overall amount you have to repay when your property is sold. Compounding interest could have a significant impact on the value of the estate as there have been scenarios where the debt is greater than the value of the home, so please consider professional financial advice and decide what’s best for you and your financial situation before making a decision
Also, reverse mortgages allow you to borrow more as you age. So, each year the proportion of your home’s value that you can borrow increases.
There are a number of risks to consider when it comes to reverse mortgages, and they are not appropriate for everyone. Westpac Group does not offer this product, but some lenders do. To give you a better idea of your borrowing ability and the impact a reverse mortgage will have on your equity over time, you can use ASIC’s Moneysmart reverse mortgage calculator.
Centrelink Pension Loans Scheme (PLS)
The Centrelink Pension Loans Scheme (PLS) reverse mortgage allows you to receive an additional income stream by taking out a loan against the equity in your home.
As part of the scheme, eligible retirees of Age Pension age can choose the amount of loan payment they receive each fortnight. However, your age and how much equity you have in your home will determine how much you can receive.
The loan amount, some legal fees, and accrued interest must be repaid. The longer you take to repay the loan, the more interest will accumulate. Before making the decision, consider professional financial advice and decide what’s best for you and your financial situation.
Family Security Guarantee
If you’re comfortable where you are, but also want to help your adult kids into their own homes, your home equity could be used as part of a Family Security Guarantee.
The Family Security Guarantee allows you to act as a guarantor to secure a family member’s home deposit. Using the equity in your home as security, this could give your kids a bit more borrowing power. It can also help to reduce their loan-to-value ratio (LVR) to under 80%, which means they could avoid paying lender’s mortgage insurance (LMI).
If you’re thinking about being a guarantor for your kids, it’s important to get some independent legal advice on the implications of being a guarantee. Have an open and honest discussions with your child and ensure that you’re confident with their financial situation and their ability to service the loan. You’ll be liable for the amount you guarantee, so if something goes wrong and your child defaults on the loan, your house may be sold to cover the shortfall.
It’s worth keeping in mind that these lines of finance access an important source of your wealth (your home) and are a financial product that could impact your eligibility for the Age Pension, your ability to afford aged care, and your ability to pay for future living expenses, medical bills, and home maintenance. It’s also a good idea to consider the implications for anyone who lives with you and what their position will be if you move out or pass away – and if any of your wealth can be left to others.
Before making the decision to use your home equity in retirement, it’s a good idea to weigh up all your options, consider professional financial advice and decide what’s best for you and your financial situation.
Have any other questions? Call us on 131 900, to learn more about equity in your home or visit any branch across Australia to talk to your local Home Finance Manager.