The pros and cons of the government’s home equity access scheme

The Home Equity Access Scheme could be a way for you to cost-effectively access the equity in your home. Nicole Pedersen-McKinnon runs the numbers.

By Nicole Pedersen-McKinnon

If you own your home outright there are ways for you to tap into the equity held in your property. The Home Equity Access Scheme (HEAS) – formerly the Pension Loans Scheme – is the federal government’s offering.

The HEAS is essentially a government loan for eligible older Australians who own their own home outright.

I say older because for this scheme you need to be Age Pension age – so 67 or older. You also need to get, or be eligible to get, a qualifying pension – the Age Pension, or a carer payment or disability support pension (note this can be $0 because your income or assets are over the threshold).

In this case, the HEAS lets you and your partner get a fortnightly payment based on your equity to supplement your retirement income, from Services Australia and the Department of Veterans' Affairs.

Like with commercial equity release products such as a reverse mortgage, you can choose how much of your property’s value you offer as security. While you don’t have to repay any of your loan during the loan period, you can choose to do so at any time.

Read this first: The pros and cons of a reverse mortgage

Loan amount is attached to your pension

But here’s the kicker: Your combined loan payments and pension, if you get one, cannot exceed 1.5 times the maximum fortnightly pension rate (if your pension changes, Services Australia will alter your loan payments so the combined amount doesn’t go over this 150 per cent of your pension rate).

However, even if you don’t get a pension, you can still get a home equity loan up to 150% of the maximum rate of any qualifying pension... so the Age Pension if you are of qualifying age.

So, this is a possible small supplementary income source… nothing on the scale of the potential commercial equity extraction for propertied-up pensioners.

Having said that, since 1 July 2022 a change in policy means you can get an advance payment on your home equity access loan… we are talking a lump sum.

Better still, this is in addition to (or instead of) your fortnightly loan payments. It could, however, reduce the fortnightly loan payment you get for the next year.

How to calculate the HEAS maximum loan amount

The maximum amount you can borrow from the HEAS overall depends on your (or your partner's) age… and how much you choose to offer as security for the loan.

To work this out, Services Australia multiplies your security value down to the nearest $10,000. Then it divides it by 10,000 and multiplies that by the age component amount.

You can see the age component amounts, below.

Note how it increases as you or your partner (the younger of) get older each year.

Be aware also that if your property’s value changes, this will also affect your maximum loan amount.

It’s also up to you to report increases and decreases in property values, in writing and signed. “If you're a member of a couple, your partner must sign the request even if they don’t own the property,” Services Australia says.

Services Australia also says: “You can choose a lower [loan] amount than the one we calculate. If you do this, your payments stop once your balance reaches that amount.”

Examples of what you could access

Bearing all of that in mind, here is an example of how the maximum loan amount is worked out. Let’s say you are 70 and want to put up $700,000 of equity for the available cash extraction.

Example:

If you are single, your $700,000 is divided by 10,000, giving 70. Then this is multiplied by your age component for 70 of $3,080… to get a maximum loan amount of $215,600.

Or if you are in a couple, with a 69-year-old partner: your $700,000 is again divided by 10,000, giving 70. But this time the age component used for the multiplication calculation is for the younger of you both, so $2960… to get a maximum loan amount of $207,200.

Don’t miss that this is extremely similar to a commercial reverse mortgage scheme – in a similar scenario the maximum withdrawal would be $210,000 of a $700,000 property.

Except that unlike with a reverse mortgage, through the HEAS you can’t get this amount up front in cash; you can only receive it in fortnightly instalments. However, in its favour, the HEAS is far cheaper than a reverse mortgage (we’ll get to that).  

Another positive point of difference with the HEAS method of equity extraction is it’s possible to transfer this loan to another property, including a new home, probably unlike a commercial reverse mortgage.

Here’s what you could own and owe with the HEAS

As with reverse mortgages, there is negative equity protection – your loan can’t grow to more than the value of the property it is secured on.

Also as with reverse mortgages, the ultimate repayment of the loan – as above – is from the sale of your property and is plus interest … but this time the interest goes to the government.

And because of that, the interest and fees on a HEAS loan are far more reasonable than those attached to commercial agreements.

As the Services Australia website says: “The current interest rate is 3.95 per cent per annum.” At the time of writing, that was roughly equal to inflation, so effectively ‘free’.

That website points out to: “Keep in mind that the longer you take to repay the loan, the more interest will accumulate.”

So what happens in that $700,000 example from before?

Far from the amount you can borrow being available all at once, in these circumstances you could only get an initial amount up to $14,512 and that 150% of pension thereafter.

“We will work out how much you can get based on the maximum [fortnightly single pension] rate of $1,674.45,” says Services Australia.

Let’s choose the maximum as an advance and the maximum as a fortnightly payment, to get the modelling as close as possible to the ‘generosity’ of a reverse mortgage.

Assuming 3% property growth, here’s how much equity you end up owning in the end.

You can see that with an advance amount of $14,511.90, your fortnightly loan payment is $1,116.30 until 16 June 2025. This is a reduced amount because of the up-front payment – from 17 June 2025, your fortnightly loan payments will increase to $1,674.45.

You will reach the maximum loan amount of $283,500 in March 2030 – which is in just 6 years.

By then, you will have been paid $251,819. You will have accrued $31,611 in interest and so owe $283,930 all up.

Like a reverse mortgage, a HEAS loan needs to be repaid if you sell your property or be paid from your estate.

Meanwhile, your home will be worth more than $811,492 (and of course, more if house price growth is stronger). So, you’ll still own $527,562 of the equity in your home.

Overall, compared to a reverse mortgage, the official HEAS is generally a far more restrictive but far cheaper option for asset-rich and cash-poor Aussies to access the equity in their home.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

_{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}