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|
- 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 $9 per fortnight.
- Impact on Cashflow
|Other income (lump sum drawdown)||$nil||$18,942|
- Impact on Net Assets – Year 17
|Loan owed to bank||$nil||$0|
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.
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