Pension loan scheme (PLS) - lower interest rates and a new name
People over age pension age have access to the Pension Loan Scheme (PLS) to increase cashflow, by drawing equity from their home. However, the PLS is not well known or widely used so the Government announced two changes today:
Reduction in interest rate – rate is set to reduce from 4.5% pa to 3.95% pa from 1 January 2022
New name – renaming to “Home Equity Access Scheme” will highlight that it is available to ALL eligible people over age pension age (not just those receiving age pension).
These changes are in addition to the 2021 Federal Budget announcement to allow some lump sum access instead of just fortnightly payments from 1 July 2022.
Using the PLS
The PLS is effectively a reverse mortgage with the Government as the lender. It has the advantage of being available to anyone over age pension age who owns real estate property in Australia that can be used as security. A caveat is registered to secure the loan.
The PLS allows a client to access the equity in their home to increase cashflow, without needing to sell their home. The interest rate is lower than commercial reverse mortgages and may be more widely available, as any Australian property can be used as security. However, the amount that can be borrowed may be less than is available under a commercial loan and the PLS currently does not allow lump sums (although this is proposed to be extended from 1 July 2022).
For example, a single person who receives a part pension of $400 per fortnight could borrow up to $1,051.25 per fortnight to bring their total Centrelink payments (including age pension and borrowing) up to 150% of the maximum single age pension (total of $1,451.25 per fortnight).
Some of the circumstances where a PLS may be useful in aged care scenarios include:
Home care – the increased cashflow could be used to pay for home care services while waiting for a Home Care Package to become available or to pay for additional top-up services to supplement the Package.
Home renovations – clients moving into residential care who need money to pay for home renovations to prepare the home for sale or rent could benefit from the proposed change to allow lump sums. This may also apply for clients planning to stay in the home.
Residential care – the fortnightly withdrawals can help clients with cashflow shortfalls (and no other available assets) the ability to meet ongoing fees, including the daily accommodation payment/contribution (DAP/DAC). Interestingly, from 1 January the MPIR used to calculate the DAP is increasing to 4.04% pa while the PLS interest rate is reducing to 3.95% pa. This may make borrowing to pay the DAP more attractive however, the amounts borrowed under the PLS will compound, increasing the effective rate over time. As such, the PLS is likely to be a more effective option only if other income or capital sources are not available to pay the DAP/DAC.
Note: The PLS (and other reverse mortgages) is usually not available on Retirement Villages (unless the person’s name is on the title deed and can be used as security).
Lump sum advances (proposal)
Under this proposal, from 1 July 2022 people will be able to bring forward the selected borrowing to withdraw a lump sum instead of waiting for fortnightly repayments. Access to up to two lump sum advances will be allowed within any 12-month period. The lump sum advances will be capped at 50% of the maximum annual rate of age pension and count towards the 150% overall cap.
In the above example, if the person elected to borrow the maximum additional amount of $1,051.25 per fortnight ($27,332.50 pa), they could choose to convert up to $12,577.50 into a lump sum, with the balance payable as fortnightly payments.
Further details on this proposal will be available when legislation is introduced.
Call us on 03 9584 3343 to discuss your needs. Financial advice and good decision-making are the keys to getting the care you need at a price you can afford.