Budget 2018: Pension Loans Scheme

Before last month's Budget, the Pension Loans Scheme was something few people knew about. Then the Budget came along and suddenly every journalist in the country wanted to know about it.

Briefly, the Pensions Loans Scheme is a government-funded reverse mortgage scheme. It is open to part-pensioners and it pays out a fortnightly income stream.

The maximum fortnightly amount you can get is equal to the fortnightly pension.

This income stream is a Government loan and the pensioner needs to put up a security, usually their own home.

Repayment occurs when the home is sold, usually when the pensioner moves into a nursing home or passes away.

The current interest rate is 5.25 per cent.

There are two changes to the Pension Loans Scheme:

First, anyone who has reached Age Pension age can access the Scheme, whereas previously only part-rate Age Pensioners could. This means self-funded retirees of pension age and full-rate pensioners can also access the scheme.

Second, the maximum fortnightly loan amount will be increased to one-and-a-half times the fortnightly pension payment.

These changes kick in on 1 July 2019, if legislation passes.

Participation in the Pension Loans Scheme is currently quite small. The Government expects that following the changes another 6,000 people will be approved.

'Approved' is a key word. Like any loan, approval depends on ability to repay, so if an application to the Pension Loans Scheme is approved would depend on the value of the security (the home, usually), life expectancy of the applicant and probably some other unpublished factors.

For example, the Department of Social Services might take into account need and would be very irresponsible if it didn't cap the total value of all loans.

CPSA is trying to get to the bottom of this for exact details of unpublished eligibility criteria.

Note that the amount quoted in the Budget ($11million) represents administrative costs. The total value of all loans is much higher than that.

The Pension Loans Scheme is a reverse mortgage scheme. While it is Government-funded and therefore more secure than commercial reverse mortgages, the usual disadvantages apply.

Getting a loan under the Pension Loans Scheme will encumber your home. The interest rate (even if it is better than a commercial rate) will very quickly eat into the equity of your home.

As a result, you may not be able to sell your house and buy another one. Or you may not have sufficient money for a nursing home bond.