Australians told to monetise the family home to fund retirement

THE number of Australians tapping the government’s reverse mortgage-style product to help fund their retirements rose almost 40 per cent in the past year as calls increase for retirees to monetise the A$1.3 trillion (S$1.16 trillion) they have tied up in property.

The nation’s Home Equity Access Scheme was used by 13,479 people in the year to June, more than double the amount who accessed it in the corresponding period two years earlier, data from Australia’s Department of Social Services shows. Under the programme, people who have reached the pension age of 67 can borrow against the equity in their property and take out a government loan. 

The data comes as a report released on Monday (Jul 22) by Australia’s Actuaries Institute recommends policy changes to encourage even more people to utilise the value stored in the family home, or to downsize to a smaller property, to help fund a shortfall in their retirement savings.

“There is a need for people to access capital from somewhere and in the home is obviously a great place to start,” the report’s author Andrew Boal said in an interview.

Australia’s A$3.9 trillion pension system is the envy of some nations and is the fastest-growing retirement saving pool in the world. Still, 60 per cent of the three million people who are set to retire in the next decade will have A$250,000 or less in their pension accounts, the report said. 

The low amount is primarily because when the system began in 1992, just 3 per cent of wages was contributed to compulsory pensions. That has gradually risen to 11.5 per cent, and will top out at 12 per cent next year. Balances will to improve over the next 20 years as more people save at the higher rate, Boal said. 

Most reverse mortgage products allow people to tap around 20 per cent of the equity in their home. 

“If you release 20 per cent of that A$1.3 trillion, we’re looking at a potential market here of A$260 billion to A$300 billion that people can use to improve their standard of living in retirement,” said Boal, who chairs the Actuaries Institute’s retirement strategy group and is a partner at Deloitte. Many people weren’t aware of the equity release programme, or didn’t understand their options, he said.

“The US and the UK markets have much more vibrant home-equity markets than we do here in Australia,” Boal said. “For example, we might have about 1 per cent of the available equity being accessed, whereas some of those overseas markets, they’re running more at 3 per cent, 4 per cent or 5 per cent.” 

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Boal’s report suggests policy changes, including relaxing the Government Age Pension assets test for people who use a home equity release programme. It also recommends removing stamp duty – or tax paid when a property is bought – for people over 55 who downsize their home. 

Australian pension funds need to do more to help retirees turn their savings into income, or to educate them about how long their balances might last, regulators said last year. 

While Australia’s retirement system is strong relative to others globally, there was a tendency for people to “over-consume housing” as they get older, Rich Nuzum, Mercer’s executive director, investments and global chief investment strategist, said.

“You may have built that house when you had two or three children, they’ve moved away, maybe they come back to visit, but you don’t need those additional bedrooms all the time,” he said in an interview ahead of the firm’s Global Investment Forum in Melbourne this week. 

The pensions industry has a role to play in helping people to understand their housing options, including reverse mortgages, Nuzum said.

Reverse mortgage-style loans are generally recovered when the secured property is sold or from the person’s estate. BLOOMBERG