Drawing Income Against the House, at a Government Rate

01 How it works

You apply to Services Australia, nominate Australian real estate as security, and choose a fortnightly amount. The combined total of your Age Pension and the loan payment cannot exceed a specified multiple of the maximum pension rate.

Lump sum advances are also available, capped as a proportion of the annual maximum, which is what makes the scheme usable for a one-off cost such as a car, home modifications or an aged care deposit rather than only as an income supplement.

The loan accrues interest at a rate set by the government, which has historically been materially below commercial reverse mortgage rates. Interest compounds on the outstanding balance fortnightly.

Repayment happens when the security property is sold, or from your estate. There are no repayments during the loan and no requirement to make any.

Source: Services Australia — Age Pension

02 The no-negative-equity guarantee

The amount repayable cannot exceed the value of the security property. Where the loan has compounded beyond the property's value, the shortfall is not pursued against you or your estate.

That guarantee is what makes the scheme usable rather than reckless. The downside is bounded at the value of the house, which is a real limit rather than a marketing statement.

It does not protect the estate's other assets from being reduced in practice, because the house is usually the estate. The guarantee limits the loss to the property rather than preventing it.

Nor does it protect a beneficiary who expected to inherit the house. That is a conversation to have while it is a decision rather than a discovery, and it is the part families most often skip.

Source: Services Australia — Asset types

03 What it does to the means tests

The loan payments are not assessed as income under the Age Pension income test, which is the feature that makes the scheme work at all — an assessed payment would reduce the pension it is topping up.

The debt reduces the assessable value of the property for the assets test, though the principal home is exempt anyway for most recipients, so that matters mainly where the security is an investment property.

A lump sum drawn and held becomes an assessable asset and is deemed, so a large advance sitting in a bank account reduces the pension in the ordinary way described in the deeming guide. Spending it, including on the exempt home, does not.

The interaction with aged care is the other one to check. A refundable accommodation deposit funded through the scheme is assessed for the aged care means test, which is set out in the means-tested fee reference.

Source: Services Australia — Income test for Age Pension

04 What it costs over time

The compounding is the entire risk. A fortnightly draw that feels modest builds a balance that grows faster each year as the interest applies to a larger amount, and twenty years of it produces a number most people would not have agreed to at the start.

The worked example runs the balance forward at a rate and a draw you supply. The useful output is the balance at 85 and at 95 rather than the fortnightly figure, because that is the number the estate meets.

Against that, the alternative is frequently selling the home, which has its own costs — transaction costs, the loss of the assets test exemption on the released capital, and moving. The comparison is in the home sale reference.

For a household that intends to stay in the home for life and does not need to leave it to anyone, the scheme converts dead equity into income at a rate below the market. That is a genuinely good outcome and it is a narrower set of households than the scheme is sometimes pitched at.

Source: ASIC Moneysmart — Retirement income

05 Who it suits

A homeowner with substantial equity, modest income, and no strong intention to leave the house to anyone is the clearest case. The equity is doing nothing and the scheme converts it into income at a below-market rate.

A household needing a specific lump sum — home modifications to stay put, an aged care deposit, a car — is the second. The advance is capped but it is enough for those purposes and it avoids selling.

It suits a household with children expecting to inherit the house much less well, and that is a conversation rather than a calculation. The debt is real and it comes out of the estate before anyone inherits anything.

It also suits a household bridging a specific period rather than funding a life. Someone who needs supplementary income for five years until a partner reaches Age Pension age, or until a property sells, borrows a much smaller amount and gives the compounding far less time to work — which is the version of this with the best ratio of benefit to eventual cost.

It does not suit someone who could reasonably downsize and wants to. Selling releases the equity outright rather than borrowing against it, and avoids twenty years of compounding — at the cost of the pension consequences on the retained proceeds.

Source: Services Australia — Age Pension