There are three (3) main alternatives to reverse mortgages as
Selling the family home and buying a cheaper one
(Downsizing). The surplus proceeds can then be invested
and the income and capital can be drawn down over time. This
usually provides the best outcomes where this is possible but the
surplus cash amount may still be subject to Centrelink's assets
and income test.
Selling the family home and renting. This can
significantly improve cashflow but can have more adverse Centrelink
consequences than downsizing. This is because the sale proceeds can
be subject to Centrelink's Income and Assets Test and hence
potentially lead to a more significant reduction in the Age
Selling a percentage of the family home to a third
party and paying a percentage of rent to that third party.
This can be a valid strategy for both the homeowner and the
investor when done on commercial terms. Again though, this will
have Centrelink consequences as the sale proceeds will potentially
be subject to the Income and Assets Test.
Example: Downsizing the Family Home
John and Joanne decide to downsize the family home instead so
that they don't have to take out a reverse mortgage on their
Sources of Funds
Sale of Family Home
Use of Funds
Purchase New Family Home
Purchase/selling costs, say
Purchase Investment portfolio
Impact on Age Pension
The $220,000 lump sum is subject to the Age Pension deeming
rates but the total deemed annual income of $7,639 is just above
the annual income free threshold of $7,176 (combined) so this only
reduces the Age Pension by around $9 per fortnight.
Impact on Cashflow
Other income (lump sum drawdown)
Impact on Net Assets – Year 17
Loan owed to bank
This strategy is superior to the reverse mortgage option as it
provides greater cashflow to meet living expenses and minimises the
depletion of capital over time.
This investment class could continue to grow in Australia and provide opportunities for domestic and offshore investors.
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