Could we lose our house if we take out a reverse mortgage?

5 hours ago 1

We were updating our wills, when the lawyer strongly advised us never to take out a reverse mortgage, claiming “you would lose the house in the interest repayments”. We are 71 and 75 years old, currently living off an account-based pension, part age pension, and some casual work. Our home is valued at $1.6 million, and our other assets around $630,000.

If 10 years from now we’ve used up our super and are fully reliant on the age pension but need more income, how would repayments to Centrelink impact the value of our house or estate? Is it really as dire as our lawyer suggested?

A reverse mortgage lets you stay in your home and avoid the costs and disruption of moving, but the repayments over time can start to add up.

The government has made it clear they expect people in situations like yours to draw on the equity in their home – either by downsizing or using a reverse mortgage. A reverse mortgage lets you stay in your home and avoid the costs and disruption of moving.

It can be an excellent solution when used appropriately. One key issue is that the debt increases over time, as no repayments of principal or interest are required. However, the impact can be minimised by starting as late in life as possible.

If the loan remains small relative to the home’s value, and the property continues to appreciate, the effect on your estate is likely to be modest. For example, if you began drawing a small reverse mortgage in your early 80s and your house was worth around $2 million, the impact would probably be minimal.

There can be Centrelink implications if you withdraw a large lump sum, as it could be assessed as an asset. But in your case, you’d be likely to use the government’s own Home Equity Access Scheme, drawing down fortnightly. This would have no effect on your pension entitlements and would keep interest costs low, as the draw-downs would be small and gradual.

I have a ComSuper pension with a notional value of $1.68 million, which counts as my transfer balance cap (TBC). At the time I commenced the pension, the limit was $1.7 million, so the rest of my super – currently $900,000 – remains in an accumulation account, as I can’t move any more to pension phase.

For the purposes of the $3 million super tax threshold, does the value of my ComSuper pension count? I already pay tax on part of it due to the untaxed component. I’m concerned that if they add my accumulation balance to the notional $1.68 million, I may eventually hit the $3 million cap. Can you clarify?

Superannuation specialist Meg Heffron confirms that defined benefits will count for this tax, but it may not be as bad as you think.

Historically, ComSuper pensions have been valued at 16 times their original starting amount. So a $1.68 million value suggests the pension began at around $105,000 per year – either at commencement, or in 2017-18 if it started earlier. Previously, this valuation remained fixed for life, even though that made little sense – pensions naturally decline in value as a person ages.

If Division 296 is enacted, the valuation method will change from June 30 to better reflect the pension’s current worth. This will probably result in a lower value than $1.68 million.

The new figure will depend on factors issued by ComSuper, the member’s age, and other features of the pension – such as whether it reverts to a partner upon death.

Am I eligible for the Seniors Health Card? I’m a self-funded retiree aged over 67 and receive no government benefits. My superannuation balance has grown to $1.85 million. I don’t use an accountant and am unsure where to find my Adjusted Taxable Income (ATI). I also assume the deemed income is based on the 5 per cent compulsory drawdown from super.

I assume you are single. Adjusted taxable income simply means all taxable income such as rents, dividends, and wages – but does not include drawdowns from superannuation. The deemed income is obtained by applying the deeming rate to that part of your superannuation which is in pension mode, but does not include superannuation in accumulation mode.

If we assume all your superannuation is in pension mode, we get a deemed income of $39,216 a year. To qualify, your adjustable taxable income plus deemed income should be less than $99,025 a year. Based on the information you’ve given, you should qualify easily for the CSHC unless you’ve got a very high adjusted tax income.

If I’ve already used my entire transfer balance cap (TBC), can I still make further contributions to my accumulation account if my total superannuation balance (TSB) falls below $2 million as at 30 June in any year?

You’re on the right track. Once you’ve used your full TBC, you can’t transfer additional funds into pension phase. However, you may be able to make non-concessional contributions to your accumulation account – provided your total super balance is under $2 million at June 30 of the previous financial year.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Questions to: [email protected]

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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