This page explains what home equity conversion loans are and the impact they may have on income support pensions or payments. These loans are also known as reverse mortgages.
A home equity conversion loan allows a homeowner to borrow against the equity in the home. It is an agreement under which the repayment of an amount is secured by a mortgage over the principal home.
Repayment of the loan, and the interest incurred, is usually deferred until the property is sold. If the homeowner dies before the property is sold, the outstanding amount is repaid from the estate.
A home equity conversion loan is a commercial arrangement and does not involve the Government.
A reverse mortgage is the opposite of a normal mortgage. The lender holds a mortgage over the borrower’s home and pays the homeowner an agreed amount as either a lump sum or instalments. In a normal mortgage situation the homeowner would be paying the lender.
Repayment of the loan (including interest), usually doesn’t have to be made until you move from your home or go into care or sell your home. The loan can also be paid off from your estate after death.
You should be aware that the money you receive from these arrangements might have an effect on your rate of income support pension or payment under either the income or assets test.
The amount drawn down under a home equity conversion loan is not counted as a person's income. This applies to the loan amount only, whether or not it is drawn down as a lump sum or by instalments.
However, if the money that is drawn down is subsequently invested in:
- a financial asset, then the invested amount will be deemed to earn income under the deeming provisions; or
- a non-financial asset, then any income actually earned, derived or received on that investment, will be counted as income.
Deeming is the method DVA uses to calculate income from your financial assets. Deeming assumes that any money you have invested in financial assets is earning a particular amount of income regardless of the actual return.
Deeming commences as soon as the loan money is deposited into your account and continues while the loan money is unspent or used to purchase certain investment products, which are themselves financial assets. However, if the loan money is spent immediately, for example on maintenance of the principal home, it is not assessable.
The first $40,000 of the home equity conversion loan is excluded from the assets tests for 90 days. Any amount over $40,000 is assessable immediately under the assets test. If the first $40,000 is not spent within 90 days, then the unspent amount will be counted as an asset.
Amounts drawn down under a home equity conversion loan are assessed as follows:
- If the money is spent on assessable assets such as cars, investment properties, or other financial assets, these will be assessed under the assets test
- Any money spent on maintenance or improvements to the principal home is not assessable because the principal home is a disregarded asset
- If the money is gifted to another person (in excess of $10,000 in a year or $30,000 over 5 years) the excess will be assessed as an asset and the amount of the gift will be held in your assessment for 5 years.
If you take out a home equity conversion loan, you will need to tell us the following information about your home equity conversion loan arrangement:
- the name of the organisation that arranged your home equity conversion loan;
- whether you elected to draw down the loan amount as a lump sum or by instalments;
- the date you received each drawn down amount;
- how you re-invested or disposed of each drawn down amount.
We need this information to ensure that we record your home equity conversion loan details correctly. We may ask you to provide documentation to verify the nature of your home equity conversion loan contract.
When you are granted an income support pension or payment and periodically after that, you will be notified of your obligations. You will be required to tell us within 14 days (28 days if you live overseas or receive remote area allowance) of changes to your circumstances that might affect the rate of income support pension or payment you receive or your eligibility to receive that pension or payment. These obligations apply equally to trustees.
In relation to home equity conversion loans, the sort of things you would need to tell us about within 14 days (28 days if you live overseas or receive remote area allowance) are as follows:
- you receive money from a new or existing home equity conversion loan, as either a lump sum or by instalments;
- you spend or re-invest any of the money you have received;
- you give away any of the money you have received.
Usually an overpayment of pension or payment will not occur when you have met your obligations. However, sometimes even if you have met your obligations, an overpayment can occur because we are unable to process the change before the next payday. We do our best to avoid this occurring, but it is not always possible. To provide you with your exact entitlement we are obliged to recover overpayments of pension or payment where they do occur.
We strongly recommend that before you become involved in a home equity product you seek independent legal and financial advice. It is important to seek specific advice on the legal and financial consequences of the arrangement.
While we make every effort to ensure that you are given accurate information, it is important that you seek written confirmation of oral information or advice before making any major decisions based on that information. We continually strive to improve the level of service you receive and make this request as an added safeguard for you.