Saturday 3 February 2024

HEAS for fun and profit

The Home Equity Access Scheme (HEAS) is a Federal Government program runs by Services Australia to provide older Australians who are Pension age (67) or older with voluntary access to a non-taxable loan from the government, secured against unencumbered Australian real estate (usually the family home). It was initially intended to provide Australian pensioners living off the Age Pension with a way to unlock some of the equity in their family home without having to sell the home and downsize, or else take out a commercial reverse mortgage (which often had relatively high costs and interest rates, and could result in someone owing more than their property was worth, if there was a housing market crash). The costs (stamp duty, conveyancing etc) of down-sizing, and the risks (and cost) or taking out a commercial reverse (home equity) loan had encouraged some pensioners to stay in their family home and fund their retirement with no other source of income than the Age Pension. Because the family home (principal residence) is not counted as a financial asset under the Age Pension assets test, there were some instances where an elderly couple would be struggling to managed on the Age Pension income while living in a multi-million dollar property, often with high council rates and other expenses.

Originally introduced in 1985 as the Pension Loan Scheme (PLS) to assist 'assets test' Age Pension recipients, it was expanded in 1997 to include 'income tested' age pensioners, then renamed as HEAS on 1 Jan 2022. It is available to those eligible for the Age Pension (ie. Australian residents aged 67 or more), but does not require qualification to receive any Age Pension (ie. the assets and income tests do not apply). The  maximum loan amount (MLA) is a fairly complex calculation equivalent to an age-based fraction of the value of the property, but essential means you can borrow up to 25% to 35% of the value of the property. The loan can either be taken as one (or two) lumps, and/or via a fortnightly regular loan amount.

Unlike a commercial reverse mortgage, the legal costs are modest (around $500) to establish the loan, the interest rate is very competitive (currently 3.95%pa, vs. a commercial reverse mortgage product currently charging 9.20% from one provider). There is also a 'no negative equity guarantee' on the government-backed HEAS loan -- once the MLA is reached interest will continue to accrue and compound, but even if there is a major drop in home prices, the loan is secured only against the property title. So, even if the loan balance was more than the value of the property when you die, the loan would be cleared entirely from the proceeds of the property sale.

When taking the HEAS loan via fortnightly regular payments, the maximum payment amount is 150% of the Age Pension payment. If you receive the full (or part) Age Pension, the HEAS payment can only 'top up' the total amount of Age Pension and HEAS payment each fortnight to a maximum of 150% of the Age Pension amount. If you choose to take one (or two) lump sum HEAS payments, you can only do one lump sum of one year's worth of 150% of Age Pension each time (ie. each lump sum is for a maximum of 1.5x the annual amount of Age Pension).

While it seems like quite a good scheme (for those wanting to access some of their home equity to provide retirement income), it hasn't been all that popular: by August 2022 it was being utilized by over 6,000 older Australians, compared to only 768 in 2019.

In our case, DW might utilize the HEAS to provide some additional retirement income once she turns 67. I estimate she could receive around $13,000pa from age 67-85, before her HEAS loan balance reached the MLA. This would supplement the SABP pension payments from her self-managed super balance.

I might also utilize the HEAS loan scheme, but I might use the fortnightly amounts to invest via dollar cost averaging (DCA). As the HEAS loan payments are not taxable income, I can start this even while still working. Provided the investment ROI is greater than 3.95% after tax, it should be a fairly low-risk instance of investing using 'other people's money (OPM).

It will be 5 years before DW and I can apply for the HEAS. And I would probably have to clear our home title (currently being used as collateral for the investment apartment mortgage) before we can apply. But this looks like a useful service for self-funded retirees such as ourselves. Of course there is the usual legislative risk that the government could suddenly change (or cancel) the scheme at any time, so it may no longer be available by the time we could make use of it.

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