Reverse Mortgage Information

Following the collapse of Money For Living Pty Ltd., reverse mortgages received some adverse publicity, much of it in the form of warnings to consumers to beware jeopardizing the family home. For the most part, this mud slinging was undeserved. Although the two sound similar on the surface, there are several important differences.

The surface similarities are undeniable. Both financial products were meant for senior citizens. Both received heavy advertising, with swimmer Dawn Fraser and actor Paul Cronin touting Money For Living (both have since expressed regret for linking their names to the scheme).

Both Money For Living and reverse mortgages supplemented lean retirement pensions with funds received utilizing equity in the family home. With both, these funds were available as a lump sum, a steady stream of income, or some combination thereof. Money For Living even offered to pay the rates and the water bill—a step beyond reverse mortgages.

However, the Money For Living scheme was not a reverse mortgage as defined by the Australian Securities and Investments Commission. The scheme, which was termed “flawed but not illegal,” did not merely release the equity in a retiree’s home, but rather purchased the home then provided a contract to the former owners, guaranteeing them a life tenancy in return for $1 per year in rent.

With a true reverse mortgage, on the other hand, retirees retain the title to their home. The lender, rather than purchasing the property, instead attaches a lien to it, similar to any other mortgage, and pays the owner a percentage of the equity value in the home.

Money For Living collapsed in September 2005 and voluntary administrators were appointed. Civil and criminal charges were filed against Money For Living and its founders, Stephen and Gary O’Neill of Victoria.

The brothers had guaranteed a monthly income to their elderly clients without possessing the means to secure those claims. They also on-sold a number of these houses to investors without disclosing the life tenancies of the former owners.

One of the O’Neill brothers, Stephen, had already spent three years in jail for fraud, and had been banned from serving as a company director for a further five years. He was therefore in violation of his sentence through his affiliation with Money For Living.

As for the pensioners who had sold their homes into the scheme, not only did their monthly cheques cease arriving, but for a while eviction also seemed a horrible possibility. However, in September 2006 Justice Finkelstein of the Federal Court ruled that their life tenancies are secure, as long as they continue to pay their yearly rent of $1.

Despite the mud slung in their direction during this fiasco, reverse mortgages remain a powerful and sound tool in the senior Australian’s retirement kit. There is no good reason for pensioners to eke out a meagre existence and preserve the equity of their homes solely for their legatees’ benefit. If properly handled, that equity can provide a steady stream of income that doesn’t interfere with their pensions, nor strip them of all they own, nor risk the loss of their home.

It’s the difference between Money For Living Pty Ltd., and actual money for living.

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.