There are three (3) main alternatives to reverse mortgages as follows:
- Selling the family home and buying a cheaper one (Downsizing). The surplus proceeds can then be invested and the income and capital can be drawn down over time. This usually provides the best outcomes where this is possible but the surplus cash amount may still be subject to Centrelink's assets and income test.
- Selling the family home and renting. This can significantly improve cashflow but can have more adverse Centrelink consequences than downsizing. This is because the sale proceeds can be subject to Centrelink's Income and Assets Test and hence potentially lead to a more significant reduction in the Age Pension.
- Selling a percentage of the family home to a third party and paying a percentage of rent to that third party. This can be a valid strategy for both the homeowner and the investor when done on commercial terms. Again though, this will have Centrelink consequences as the sale proceeds will potentially be subject to the Income and Assets Test.
Example: Downsizing the Family Home
John and Joanne decide to downsize the family home instead so that they don't have to take out a reverse mortgage on their home.
| Sources of Funds | |
| Sale of Family Home | $700,000 |
| Use of Funds | |
| Purchase New Family Home | $450,000 |
| Purchase/selling costs, say | $30,000 |
| Purchase Investment portfolio | $220,000 |
| $700,000 | |
- Impact on Age Pension
The $220,000 lump sum is subject to the Age Pension deeming rates but the total deemed annual income of $7,639 is just above the annual income free threshold of $7,176 (combined) so this only reduces the Age Pension by around $9 per fortnight.
- Impact on Cashflow
| Status quo | Downsizing | |
| Age pension | $31,688 | $31,457 |
| Other income (lump sum drawdown) | $nil | $18,942 |
| $31,688 | $50,399 |
- Impact on Net Assets – Year 17
| Status quo | Downsizing | |
| House value | $700,000 | $700,000 |
| Investment portfolio | $nil | $7,857 |
| Loan owed to bank | $nil | $0 |
| Net assets | $700,000 | $457,857 |
- Conclusion
This strategy is superior to the reverse mortgage option as it provides greater cashflow to meet living expenses and minimises the depletion of capital over time.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.
