anderson, kate
TRANSCRIPT
Reverse Mortgages
A Solution For Asset Rich/Cash Poor Retirees
Strategic Ramifications &
Planning Opportunities
Speaker: Kate Anderson
Company: Mariner Financial
Date: Wednesday 22 November 2006
What Will Be Covered?
Reverse Mortgages Target clients for financial planners Common applications
Social Security Considerations Assets and Income Test Gifting
Case Studies Undertaking home renovations Allowing proceeds to accumulate Paying off the mortgage for ageing parents Lump sum, drip feed and re-draw options - impact on social security entitlements Funding an Accommodation Bond Special Disability Trust Measures
Reverse Mortgages
A reverse mortgage, commonly referred to as an equity release loan, is a mechanism which allows a consumer to convert part of the equity locked up in their home into a lump sum, a regular stream of payment or both
The borrower retains title to the property and the outstanding loan balance grows over time as interest is capitalised, rather than being repaid
The borrower is usually not required to make any repayment on the loan until they die, sell or vacate the home
A reverse mortgage is generally available to those aged 60 years or over who own their own home
The amount that is available to be borrowed is usually between 15% and 40% of the total value of the home as valued by an approved valuer
Large and Rapidly Growing Community
Consumer needs in retirement is great
2.6 million retirees in Australia
2.1 million own their own home
80% of these are on the pension and retired with less than $70K
Retirement population is growing
2.1 million in 2004 = 11% of total Australian population
Expected to grow to 25% of Australian population
Over time we will see people approaching retirement, retiring on more than $70K as they have had more years in the superannuation market
Source: Australian Bureau of Statistics
Financial Pressure in the Household
Average weekly household income for Australians between 55 and 64 = $1,035
Reduces significantly >65 to $540 per week
68.4% rely on the government for primary income
80.2% own their own home with no mortgage
Highest projected Australian growth segment is >85 which is projected to grow
from 1% to 7-11% by 2010
Pension growth below cost of living
The average Australian pensioner has a gap to fill
Household final year income 55-59 =$62,376*
Pension = $12,711.40
$
Source: *HILDA Wave 2 Australian Bureau of Statistics
Australia’s Fastest Growing Segment is 65 yrs +
Population : 2004 vs 2014
2004 Population
Projected 2014
0
100000
200000
300000
400000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
Population Growth by Age Band : 2004 vs 2014
-10%
0%
10%
20%
30%
40%
50%
60%
70%
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85+
5yr Age Band
Grow th in Period
Quinquennial Age Groups
All Ages
13% Australians > 65 (i.e. 2.6 million)
By 2020 - 19% > 65
By 2050 - 27% > 65
Children can maintain a higher standard of living than their parents
Many children would prefer their parents to utilise assets to maintain quality of life
Source: Trowbridge Deloitte
Clients Who Can Use a Reverse Mortgage
Target Clients for Financial Planners
People 60 years and over:
Current retiree clients with investment funds locked up and with short-term
cash needs
Lapsed retiree customers with some investment history but no investment
funds remaining (perhaps lapsed Allocated Pension clients); and
Non-clients who are retired with asset/income imbalance but no investment
history
Clients in accumulation phase who are currently supporting their parents
Common Applications
Supplementing existing funds with regular cash flow
Covering essential services such as medical costs
Undertaking home renovations
Paying out an existing mortgage
Generating an income stream
Funding ongoing home care
Paying an accommodation bond to an age care facility
Relieving the burden on the accumulator who is supporting a parent who owns
their own home
Making a contribution into superannuation
For wealthier retirees who wish to pass on their inheritance while they are alive by
borrowing funds against the value of their home and giving it to intended
beneficiaries
Issues That Should Be Considered
Projected movements in interest rates and property prices
Variations in consumer’s life expectancies and old-age caring and housing needs
Intergenerational tensions and conflict between the desire to leave an inheritance
and the need for money to live on in older age
How much care they may require both at home and perhaps in aged care facilities
and the costs of such needs
How much super they have and how much if any government benefits they may
be entitled to
If they receive regular payments from a provider, whether there will be sufficient
funds available to sustain these payments for the rest of their lives
Social Security Considerations
The Social Security Act has special rules covering home equity conversion
agreements, which means:
“…. an agreement under which the repayment of an amount paid to or on behalf of the person, or the person’s partner, is secured by a mortgage of the principal home of the person or person’s partner”
Implications for both the Income and Assets Tests
Note
The monies advanced from a loan are not income under the Income Test; and
The loan itself is not an asset under the Assets Test
The Assets Test
Under a reverse mortgage, where the amount borrowed is unspent:
The first $40,000 is not counted as an asset for 90 days; and
The amount over the first $40,000 is counted as an asset immediately
Where the amount borrowed is spent, depending on what the funds are used for,
further assessment may be necessary
If the amount is spent on non-assessable items (e.g. repairs or improvement to
the principal place of residence) no further assessment is necessary
If the amount is spent on assessable items (e.g. a motor car) the relevant
Income and Assets Test will apply
The Income Test
The amount advanced under a reverse mortgage is not income itself; rather any
additional income assessable under this Test depends on how the loan proceeds
are used
Where the unspent part of the loan is held as a financial asset (e.g. bank account,
shares, managed funds) it will be subject to deeming. Where the loan is spent on
consumer goods, no additional income is included under the Income Test
Financial investments under the deeming provisions of the Income Test are
‘deemed’ to earn a certain rate of income no matter what rate of income is actually
earned
Case Study 1 - Undertaking Home Renovations
Couple, both age 75
Asset rich – family home valued around $500,000
Income poor – full age pension only*
They do not want to sell their home
Tap into $30,000 home equity to renovate interior and exterior of home
$30,000 is spent immediately
No deemed income under the Income Test
$30,000 spent on home improvements (an exempt asset) and therefore does not
count towards assessable assets
Full age pension not affected*
*Based on social security rates effective 20 September 2006
Case Study 2 – Allowing Proceeds to Accumulate
Single pensioner aged 75
In receipt of the full age pension*
Tap into $90,000 home equity and allow loan proceeds to accumulate in bank
account
The $90,000 is being held as a financial asset (bank account)
Deemed income on full amount immediately
Up to $3,732 p.a. ($144pf) counted as income
Could lead to a reduction in the age pension
Income free area $128pf*
$50,000 of the loan when held in bank account will count as an asset immediately
After 90 days, the remaining $40,000 will also count as an asset
*Based on social security rates effective 20 September 2006
Case Study 3 – Paying Off the Mortgage For Ageing Parents
45 year old accumulator
Paying mortgage for ageing parents
Siblings unable to contribute
Parent home worth $500,000
Outstanding loan worth $40,000
Parents tap into $60,000 home equity
Apply $40,000 to settle existing mortgage and $20,000 to renovate bathroom
Keep capital and investment plan intact
Burden of supporting parents carried by the estate and will be shared equally
by siblings
Case Study 4 – Impact on Social Security Entitlements
Rex and Bonny both aged 70 have paid off their family home now valued at
$900,000
Their only other assets are lifestyle assets of $30,000 and financial assets of
$40,000
They are in receipt of the full age pension*
They decide to borrow $225,000 (LVR 25%) against the value of their property
What options do Rex and Bonny have as to how they can receive the $225,000,
and how will this impact their social security entitlements?
Option 1: A single lump sum of cash
Option 2: A drip feed facility; allows Rex and Bonny to receive a regular cash
payment over a number of years ($1,250 each month)
Option 3: A re-draw facility; allows Rex and Bonny to request cash advance whenever needed ($2,000 each month); or
Option 4: A combination of the above * Social security rates and thresholds effective 20 September 2006
Option 1: Lump Sum
The receipt of the $225,000 is not assessed as income for social security purposes ($40,000 is taken in cash and used immediately for living expenses)
The $40,000 is subject to deeming as a financial investment under the Income Test from the date of its receipt
The excess over $40,000 ($185,000) will also be subject to deeming under the Income Test from the date of receipt as it is being held in a bank account which is deemed as a financial investment.
However, the deemed income will reduce as the amount borrowed is spent.
The $40,000 is being spent within 90 days of being received and is therefore not assessed for the Assets Test
The excess over $40,000 ($185,000) is assessable as an asset immediately under the Assets Test as it is being held in a bank account.
Income Test Assets Test
Option 1: Lump Sum
Subsequent to reverse mortgagePrior to reverse mortgage
$19,973*
in yr 1
Social Security Age Pension
$22,391*
in yr 1
Social Security Age Pension
$11,974
(deemed amt)
$225,000
Financial assets
Cash/Bank Account
$1,200
(deemed amt)
$40,000
Financial assets
Cash/Bank Account
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
* Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance
Option 2: Drip Feed
The approved loan amount is not the property of Rex and Bonny until the funds are
accessed
As the regular monthly cash payments of $1,250 are low and being used immediately they will not be assessed under the Income Test.
The undrawn amount remaining in the facility (i.e. the amount that is being held but not attracting interest) will also not be deemed as a financial investment under the Income Test.
The undrawn amount remaining in the facility for the benefit of Rex and Bonny but not attracting any interest will not be assessed under the Assets Test.
These are not monies that are at Rex’s and Bonny’s immediate disposal.
Income Test Assets Test
Option 2: Drip Feed
Subsequent to reverse mortgagePrior to reverse mortgage
$22,391*
in yr 1
Social Security Age Pension
$22,391*
in yr 1
Social Security Age Pension
$1,200
(deemed amt)
$40,000
Financial assets
Cash/Bank Account
$1,200
(deemed amt)
$40,000
Financial assets
Cash/Bank Account
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
* Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance
Option 3: Re-draw FacilityThe approved loan amount is not the property of Rex and Bonny until the funds are accessed
Rex and Bonny’s withdrawal request each month of $2,000 is low and as it is being used immediately for living expenses it is not assessed under the Income Test.
The undrawn amount remaining in the facility (i.e. the amount that is being held but not attracting interest) will also not be deemed as a financial investment under the Income Test.
The undrawn amount remaining in the facility for the benefit of Rex and Bonny but not attracting any interest will not be assessed under the Assets Test.
These are not monies that are at Rex’s and Bonny’s immediate disposal.
Income Test Assets Test
Option 3: Re-draw Facility
Subsequent to reverse mortgagePrior to reverse mortgage
$22,391*
in yr 1
Social Security Age Pension
$22,391*
in yr 1
Social Security Age Pension
$1,200
(deemed amt)
$40,000
Financial assets
Cash/Bank Account
$1,200
(deemed amt)
$40,000
Financial assets
Cash/Bank Account
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
* Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance
Option 4: Combination of Lump Sum & Drip Feed
The approved loan amount is not the property of Rex and Bonny until the funds are accessed ($40,000 is taken in cash and used immediately for living expenses)
The $40,000 is subject to deeming as a financial investment under the Income Test from the date of its receipt. However, the deemed income will be reduced as the amount borrowed is spent. As the regular monthly cash payments of $1,250 are low and being used immediately they will not be assessed under the Income Test.
The undrawn amount remaining in the facility will also not be deemed as a financial investment under the Income Test.
The $40,000 is being spent within 90 days of being received and therefore is not assessed for the Assets Test.
The remaining loan amount that is being held and not attracting any interest for the benefit of Rex and Bonny will not be assessed under the Assets Test. These are not monies that are at Rex’s and Bonny’s immediate disposal.
Income Test Assets Test
Option 4: Combination of Lump Sum & Drip Feed
Subsequent to reverse mortgagePrior to reverse mortgage
$22,391*
in yr 1
Social Security Age Pension
$22,391*
in yr 1
Social Security Age Pension
$2,724
(deemed amt)
$80,000
Financial assets
Cash/Bank Account
$1,200
(deemed amt)
$40,000
Financial assets
Cash/Bank Account
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
Income
$0
Assets
$30,000
Lifestyle assets
Car/Home Contents
* Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance
Gifting
From 1 July 2002, a single or married couple can gift up to $10,000 each financial year, with a maximum of $30,000 over a five year period
Gifting (disposal) of assets worth more than the allowable amount or free area is known as “deprivation”
Deprived assets are:
Included in a pensioner’s assets until the fifth anniversary of the date that the
disposal was made; and
The total value of a pensioner’s deprived assets are added to the value of all other
financial investments. Deeming rates are then applied to the total of a pensioner’s
financial investment to calculate their assessable income.
Gifting
If Rex and Bonny choose Option 3 to access the equity in their home, how much are they able to gift over a 10 year period without affecting their social security entitlements?
Over a 10 year period a maximum of $60,000 can be gifted
$60,000Total
-10
-9
$10,0008
$10,0007
$10,0006
-5
-4
$10,0003
$10,0002
$10,0001
GiftYear
Case Study 5 - Funding an Accommodation Bond
Effective 1 July 2005, lump sum accommodation bonds paid by residents are
exempt from the Asset Test
Aged care residents who pay a component of the bond by periodic payments are
able to rent out their former home without the value of their home or their rental
income affecting their Social Security entitlements
If an aged care resident rents out their former home to pay some or all, of the
bond by periodic payments, the former home is exempt from the Assets Test for
as long as they are liable to pay the periodic payment
Financial planners may be able to structure the affairs of a client entering into low
level care so as to keep the age pension as well as the family home
The rental income from their home can then be used to fund some of the costs of
a residential age care facility
Case Study 5 - Funding an Accommodation Bond
Single pensioner aged 75
In receipt of the full age pension*
About to enter into low level (hostel) care and asked to pay an accommodation
bond of $135,000, however they do not wish to sell their family home
Decides to pay the accommodation bond in periodic payments, which is made up
of two components, the amount the service provider can deduct annually for up to
five years, and also the interest that the provider would normally earn on the lump
sum
*Based on social security rates effective 20 September 2006
Case Study 5 - Funding an Accommodation Bond
Residential aged care costs
$30,426 p.a.Total
$13,500* p.a.
(10% x $135,000)
Periodic payments
10% is the maximum interest rate (July – Sept 2006)
$3,282.00 p.a.
($273.50 x 12 months)
Retention amount
$0.00 p.a.Income tested fee
In receipt of the full age pension
$13,644* p.a.
($37.38 x 365 days)
Basic daily care fee
Bond is greater than $125,500 and therefore the non-pension basic daily care fee applies
* Social security rates and thresholds effective 20 September 2006
Case Study 5 - Funding an Accommodation Bond
Total income
$26,315 p.a. Total
$13,000 p.a.
($250 x 52)
Rental income
$13,315* p.a.Social security age pension
Paying bond by periodic payments and therefore able to rent former home without the value of the home or the rental income affecting the age pension. Former home will be exempt from the Assets Test for as long as the periodic payment is paid
* Social security rates and thresholds effective 20 September 2006
Case Study 5 - Funding an Accommodation Bond
$4,111 shortfall!
Accessing the equity in his home may enable a person entering into low level
(hostel) care to bridge the gap between the residential fees they have to pay and
the total income they receive from the combined age pension and rental income
Certain issues must be considered if the payment of an accommodation bond via
periodic payments is funded through a reverse mortgage
Tax issues - CGT exemption
Insurance on the home
Cost of financial plan initially and ongoing
Ongoing management issues of residential home being let
Case Study 6 - Special Disability Trust Measures
Effective 20 September 2006
The measure will assist families to make private financial provision, through a
special disability trust, for the future care and accommodation needs of their
children and close relatives with severe disabilities
The trust must be established solely in order to provide for current and future care
and accommodation needs of the beneficiary
The assessable assets of the trust will be exempt from the means test to
$500,000 (indexed annually)
Under the Assets Test, where the assessable assets of the trust are in excess of
the $500,000 limit, the balance is to be assessed as the beneficiary’s assets
Under the Income Test, the income derived by the trust and income received from
the trust by the beneficiary are exempt from the Income Test
Case Study 6 - Special Disability Trust Measures
Couple, both age 70
Daughter, aged 19 is severely disabled – in receipt of the full disability support
pension
Asset rich – family home valued at $550,000
Income poor – full age pension only*
They don’t want to sell their home, however they are unable to provide their
daughter with the extra financial support she needs for the ongoing care now and
after they have passed away
Tap into $225,000 home equity and contribute into a special disability trust with
their daughter as the principal beneficiary to provide for her current and future
accommodation and ongoing care
Full social security pensions (age pension and disability support pension) not
affected*
* Social security rates and thresholds effective 20 September 2006
Social Security Implications – Wrap Up
Be aware of the social security rules
How the proceeds from a reverse mortgage are used may affect social
security benefits
Careful advance planning as to how and when the funds are spent may help
borrowers to retain benefits
Why borrow money and let it sit in the client’s bank account for 90 days?
Why borrow the money in the first place if it is not needed?
Important to remember that periodic payments:
Are a return of capital and are not taxable
If spent and not accumulated, do not count under the Income Test
Are backed by a 100% Assets Test exempt asset (family home)
2006 Federal Budget AnnouncementsImpact on reverse mortgage strategies
Undeducted contributions
Personal after-tax contributions will be limited to $150,000 p.a. (three times
the limit for concessional contributions). A higher cap of $1 million will apply
for the transitional period from 10 May 2006 to 30 June 2007
Nearing or approaching retirement – strategy involving selling investment
property and contributing proceeds into super
Option – reverse mortgage on investment property
Pension Assets Test
The Assets Test taper rate for pensions will be halved. Pension recipients will
only lose $1.50 (not $3.000 per fortnight)
For example, based on current pension rates and thresholds, the proposed
changes mean the pension will not cut out until a single homeowner’s assets
exceed approximately $494,000 (currently $325,500). A homeowner couple will
receive part pension if their assets are under $783,500 (currently $503,200)
Action Plan
Review Existing Client Database:
Retiree customers with investment funds locked up and short term cash needs
Lapsed retiree customers with no investment funds remaining
Current accumulation customers who are supporting their parents
Current retiree customer with asset/income imbalance
Due to the implications a reverse mortgage may have on a client’s personal
circumstances financial advice should be a mandatory requirement for the product
providers to release funds
Log on to www.marinerretirement.com.au to access reference material, quick
reference and technical guides
Disclaimer
The information contained in this presentation is for financial advisers only and is not to be passed on to retail clients, unless it forms part of the financial adviser’s own advice to the client. The information is not a securities recommendation. It is a guide only and based on legislation current as at September 2006. We believe the information contained in this update has been obtained from reliable sources but we cannot be responsible for any errors, omission or inaccuracies.