Australia’s stagnant reserve mortgage market faces better prospects if the government acts on the finding of the Retirement Income Review that accessing equity in the home can significantly boost retirement incomes without eroding too much equity.
A key theme of the review, which Treasurer Josh Frydenberg released on Friday, is that “a more optimal retirement income system would involve retirees more effectively drawing on all their assets, including the equity in their home”.
The review, which was chaired by economic consultant Mike Callaghan, said the two measures the government has used to encourage retirees to access the value of their home to fund their retirement have had limited success.
One is the downsizer contribution, which allows people over 65 to contribute up to $300,000 to superannuation if they sell their home. Between 1 July 2018 and 17 January 2020, only 9000 people made downsizer contributions.
The other is the Pension Loan Scheme, a form of reverse mortgage where income from the scheme is not assessable in the age pension mean test. It has also had limited take-up.
The overall reverse mortgage market has struggled. According to APRA data, reverse mortgage balances were just A$2.5 billion in June – down from $2.7 billion a year earlier.
The review says the government needs to do more to educate people about how to set up a retirement income plan, including the use of reverse mortgages and other equity release schemes.
It says that using relatively small portions of home equity can substantially improve retirement incomes, For example, using the Pension Loan Scheme to add $5000 to annual income increases the replacement rate of the median earner by 10 percentage points.
Withdrawing $5000 a year would mean that retirees still have about three-quarters of the value of their home at age 92, for a house worth $500,000 at retirement. Retirees with higher value homes would maintain even higher proportions of home equity while still benefiting from significant improvements in replacement rates.
The review also canvasses the prospect of ending the exemption of the principal residence from the age pension assets test, which it says is a disincentive to using the equity in the home to support retirement incomes.
“The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement. Accessing equity in the home can significantly boost retirement incomes without the need for additional contributions.
“If the home were included in the assets test, some home owners would no longer be eligible for the Age Pension and others would receive less Age Pension. In response home owners may be more inclined to access the equity in the home to fund their retirement.
“A number of stakeholders raised issues about over-investment in housing and housing being used for estate planning. Some submissions suggested that the principal residence should be partially assessed in the assets test when the value exceeds a certain threshold.
“The Council on the Ageing reported that a poll of its constituents found an even split on the prospect of including some value of the home in means testing.
“Maintaining the exemption but including a high-value cap could reduce inequitable outcomes.”