Five ways you can use your home to overcome low interest rates

1 October 2019

While record low interest rates may be great news for home buyers, they are generally horrible news for Australian retirees who rely on their savings income.

The good news is that the family home - whether it is owned or rented - does provide a number of significant opportunities to generate income for retirees in a low interest rate environment.

We’ve outlined five ways this could be the case:

1. Downsizing from the home

Just over half of the 40 people who responded to a poll on our Facebook page, stated they were considering downsizing from the family home, so they can release home equity to boost their retirement savings, because of low interest rates. 

Fortunately, it is these very same low interest rates that are also making it easier for downsizers to sell the home, because they are breathing life into the property market.

As we have reported previously, the Australian Government has a downsizing superannuation incentive. Australians aged over 65 are using this incentive to boost their super by, on average, around $200,000. 

Using the incentive, a 65-year-old adding $220,000 to their super would be able to draw an additional tax-free income of $15,000 per year until age 88 - a pretty handy amount when interest rates are as rubbish as they currently are.

Find out more about the government’s incentive here.

Downsizing has a number of benefits, including allowing people to move into alternative, age-appropriate accommodation, often located within a supportive community. 

Downsizing from the family home however may come with costs, in particular stamp duty on the new home and agent’s costs when selling the old home. 

The stamp duty impost can usually be avoided however by moving into a lease or licence retirement village unit or a land lease community.

In addition, downsizers need to consider the fact that the released equity does count towards the pension assets and income tests, which could impact on eligibility for a part or full pension.

2. Unlocking the equity in the home

There are both commercial and government ‘reverse mortgage’ schemes in place to help retirees to unlock the equity in their home, while still living in the home.

The government’s expanded Pensions Loans Scheme, came into effect on 1 July 2019 and allows retirees to access a fortnightly amount representing 150 per cent of the maximum pension payment, via a government loan secured against their home.

A 5.25 per cent interest rate will apply to the loan, which will need to be paid back to the government when the home is eventually sold.

However, as outlined in this story, there are downsides to this scheme. 

One of the biggest downsides is that it encourages elderly people to stay in their existing home, when this home may not have the necessary ageing-in-place safety features that a newer home may have. It could also lead to loneliness, as older people are left isolated in their home.

3. Working from home

OK - this is a bit of a controversial one...but stay with us.

There is clear evidence that an increasing percentage of older Australians are staying in, or re-entering the workforce, because they either need the money or the mental stimulation.

In August 2019, around 15 per cent of Australians over 65 were still working part-time or full-time, up from 10 per cent in August 2009 and just 5.4 per cent in August 1999.

Part-time work is the most popular option for Australians aged over 65 (compared to the 1990s when there were more elderly Australians in full-time work). In July 2019, there were 345,000 Australians aged over 65 undertaking part-time work, compared to 256,300 in full-time work. 

These seniors are no doubt taking advantage of a number of tax incentives to supplement their retirement or pension income.

For instance, the Australian Government’s Age Pension Work Bonus increases the amount an eligible pensioner can earn from work before it affects their pension rate. 

From 1 July 2019, the amount fortnightly income from work that is not assessed and is not counted under the pension income test, increased from $250 to $300.

Meanwhile, the Seniors and Pensioners Tax Offset (SAPTO) allows Australians over 65 to take advantage of a $2,230 tax offset for annual incomes up to $32,279 (in 2017/18) and then a lower offset amount which extinguishes at an income level of $50,119.

These helpful tax breaks mean that seniors may be able to undertake part-time work at home, to overcome the low interest rates, but at the same time minimise their tax burden and keep access to the pension.

4. Move to a rental community

There are potential benefits in moving to a rental community, including the possibility that you can claim Commonwealth Rental Assistance and also don't have to pay stamp duty to move in.

For instance, an increasing number of Australians are deciding to move to senior-specific rental communities in regional areas, where the living costs are lower. 

Often, the rents in these villages are low enough to allow pensioners to be able to pay for both their accommodation and other living expenses. This means you may no longer be need to be reliant on savings income, in a low interest rate environment.

The downside, of course, is that senior Australians may not want to have to move some distance to get into a village.

This story explains more about the increasing popularity of rental villages.

Other forms of seniors rental housing includes land lease communities (where you own the dwelling and rent the land underneath it) and leasehold retirement villages.

           5. Use your garage for a profitable hobby

A number of land lease communities are now offering super-sized garages, which can be used for any number of potentially profitable hobbies, including arts and crafts, collectables or your unique brand of home-made food.

Of course, the danger is that you'll end up spending more money on your hobby, than you ever get back at the markets or online!

By Mark Skelsey, Editor at Downsizing.com.au

Please note this story has been prepared as a general guide only, and should not be relied upon as a substitute for seeking your own independent legal and financial advice. 

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