In last year’s Federal Budget, the Coalition government announced it would expand the scheme, so it can be accessed by a far greater number of pensioners.
To qualify, you or your partner have to be at least age pension age, own your own home outright or own an investment property outright, have adequate insurance covering the secured real estate and not be a bankrupt or subject to a personal insolvency agreement.
Those who meet the criteria can apply to receive an income stream of up to 1.5 times the maximum rate of the age pension each fortnight.
For example, a single person who meets the criteria and is receiving the full pension plus supplements of about $24,000 a year will be able draw another $12,000 – taking their total annual cashflow to about $36,000 a year.
The loan is paid as an income stream each fortnight and cannot be taken as a lump sum.
The debt builds as the loan funds are drawn down and, as no repayments are made, the interest is capitalised and the debt builds quickly.
Dianne Chalk, a financial planner who specialises in aged care at Hillross Fairy Meadow, says there could be a strong uptake of the scheme, “especially by those who are single and all they have is the age pension.”
“People are living longer and they are running out of money and, the reality is, they want to stay in their home for longer and they don’t want to downsize,” she says.
Money freed up from downsizing would count under the assets test for the age pension; whereas, income from the Pension Loans Scheme does not count under the income test.
Brendan Ryan, a financial adviser and founder of Later Life Advice, says the scheme could be a good option, particularly for older retirees whose savings are running down but want to keep a certain level of cash on hand.
However, they would want to be drawing the full age pension first, before topping up with the Pension Loan Scheme, Ryan says.
As the scheme is administered by the Department of Human Services, borrowers don’t have to worry about being subjected to the sometimes sales-driven culture of the financial services industry, which should provide some comfort to those in later life, he says.
Others with specialist knowledge of aged care, such as Louise Biti, co-founder of Aged Care Steps, which gives advice to financial advisers, say the scheme could be used not only to meet living expenses but pay for private home care while waiting for government funding.
The loans’ variable interest rate of 5.25 per cent is less than the rates charged by the dwindling number of private-sector providers of reverse mortgages.
Unlike with the Pension Loans Scheme, private-sector reverse mortgage providers allow the money to be taken as a lump sum.
Applications for the Pension Loans Scheme can be made online with a Centrelink online account through myGov.
Writes about personal finance for The Sydney Morning Herald and The Age.