by Brent Jones

My aunt asked me if I could help her arrange a reverse mortgage so that she could get her leaky roof, and a few other things, fixed . I called a broker to discuss. He recommend that, instead of a reverse mortgage, which are typically expensive and underwhelming, we look at the governments Pension Loan Scheme.

It turns out that our friends in Canberra have a scheme where those on an qualified  pension can access equity in their home to increase their fortnightly pension. This article has nothing to do with SMSFs but it may help some your older clients or your aunt.

Here’s how the scheme works.

Using the equity in a home older Australians can get a fortnightly loan from the government. No lump payments are available. 

Pensioners choose the amount of loan they get each fortnight. This amount can be up to 1.5 times the maximum payment rate of the eligible pension.

The combined pension and loan payments can’t exceed 1.5 times the maximum pension rate. The loan payment will automatically increase or decrease to avoid this.

Maximum loan amount

The maximum loan amount is calculated using the Age component (eg, for a person aged 76 the Age component is $3,900) multiplied the equity in the security property divided by 10,000.

So, by my reading of this, if the property is valued at $400,000, we divide that by 10,000 and multiply that by $3,900 to arrive at $156,000 as the maximum loan amount for a 76 year.

Fortnightly loan amount

Once the maximum loan amount is established, then the pensioner can choose the amount of the loan the receive each fortnight. When nominating a fortnightly loan amount, they can either choose a fixed amount or a percentage up to 150% of their maximum pension rate. Here’s an example from the Services Australia website.

Example of nominating a fortnightly loan amount

Joseph gets the Age Pension. For this example, the maximum Age Pension rate is $926 per fortnight. Under the Pension Loans Scheme (PLS) Joseph can get 1.5 times this amount. This is $1,389, which is $926 multiplied by 1.5. That means the maximum amount of payment he can get per fortnight, including his loan and Age Pension, is $1,389.

For this example, let’s assume Joseph gets the maximum rate of Age Pension. He nominates a fixed amount of $500. This amount plus his Age Pension payment exceeds the maximum amount he can get of $1,389 each fortnight. This means he can get $463 as a loan payment instead of $500. We get this by subtracting the Age Pension rate he’s paid from the maximum PLS amount he can get. That is, $1,389 minus $926.

If Joseph had a reduced Age Pension rate of $300, the maximum amount he can get is still $1,389. This means we can increase his PLS payment to his nominated amount of $500. This means Joseph gets $800 per fortnight.

If Joseph chooses a percentage of the maximum Age Pension rate, his fortnightly payment amount won’t change. Even if his rate of Age Pension changes, the fortnightly amount he gets won’t. This is because the loan payments will adjust to keep the total amount per fortnight at the fixed percentage of the maximum rate.

For instance, if he chooses 150% this means that Joseph will always get $1,389 even if his payment rate changes. If he is getting the maximum rate of $926, his fortnightly payment will increase to $1,389. If his pension payment drops to $300 he will continue to get $1,389. His loan payment rate will adjust so that he continues to get 1.5 times the maximum pension rate.

Loan interest and Paying off the loan

Since 1/1/2020, the feds charge an annual interest rate of 4.5% which compounds each fortnight on the outstanding loan balance. It’s not free money.

The loan can be repaid in part or in full at any time. At any time pensioners can access the loan payout amount so that the charge or caveat on the property can be removed.

If there’s an outstanding loan after death, the loan will be repaid from the estate after 14 weeks. If there is a surviving partner of pension age and living in the security property, repayment may be deferred. In this case, the loan continues to attract interest.