While it perhaps should not be the determinant factor in the decision, an element in one’s calculations when considering a reverse mortgage should be how Centrelink will assess the funds generated and whether they will affect one’s pension entitlements. Some knowledge along those lines may assist prospective borrowers prior to any meeting with Centrelink representatives or finalizing their decision.

The information in this discussion has been drawn from a Centrelink publication, however, it is intended as a guide only; for specifics, a Centrelink representative should be consulted (13 2300).

Centrelink employs two tests when assessing reverse mortgage proceeds for pension benefits: the income test and the assets test.

Equity withdrawn from a principal place of residence via a reverse mortgage is generally not counted for the income test. However, any amount over $40,000 will be counted for the assets test until it is spent, and any amount below $40,000 will be counted for the assets test if it has not been spent within 90 days of withdrawal.

This will in particular affect those borrowers who withdraw their equity in a lump sum, or as a combination lump sum and income stream, as it would be to their advantage to keep the total amount withdrawn per year below that threshold and spend the money before it would be counted.

There are certain conditions under which these withdrawn funds would be deemed as income under the income test. The word deeming means the funds are assumed to be earning a certain level of interest, and that sum is added to the sum of all income received from other sources to be used in the calculation of benefits.

To fully understand the ramifications of deeming, it is important to understand that deemed funds are presumed to be invested and earning interest, whether they are deposited in a high-yield capacity earning twice the deemed amount or stuck in a shoebox beneath the mattress. It’s all one to Centrelink.

There are two situations which deem as income the funds derived from a reverse mortgage on a principal place of residence: the first is gifting, and the second is investing.

According to a report issued by the Australian Securities and Investments Commission in November 2007 entitled “All we have is this house,” approximately 20% of the reverse mortgage borrowers surveyed took the loan with the intention of financially assisting family members, usually adult children in need of funds for housing or businesses. However, with Centrelink’s restrictions, these gifts may not exceed $10,000 per year, with a maximum of $30,000 in five years. Any gifts beyond that point sees the funds deemed as income under the Centrelink incomes test, with a resultant affect on the pensioner’s benefits.

Funds deposited into a financial investment are also deemed at Centrelink’s current rate, unless the investment is one not counted under the asset test, such as an allocated pension. In such a situation, the rule covering that financial product would apply.

It’s also important to understand that certain purchases made with funds received from a reverse mortgage, such as a car, may be counted as assets by Centrelink. This too may unhappily affect one’s pension.