Family Home Equity - the hidden gold mine
Written on the 20 April 2021 by Parkside InvestorPlus
Without a doubt, for most people, their homes are the biggest asset they possess.
If you have been diligently paying off your mortgage and possibly even contributing extra payments here and there when you could afford to and coupled with rising home prices your home represents a substantial wealth resource especially if you are lucky enough to have paid off the mortgage or are very close to doing so.
There was a time when home ownership represented itself as more of a psychological important asset but today, given the challenges many are facing trying to get into the housing market a home is now a major store of wealth.
I'm sure you've heard the saying 'asset rich and income poor'. This statement simply reflects the fact many Australians did not have the opportunity to accumulate vast sums of retirement savings in superannuation, yet they now own their homes.
According to research, your home equity represents three to four times as much value as your superannuation this is based on an average superannuation balance of $200,000 at retirement with a home equity of around $750,000.
Just to be clear, home equity is defined as the amount of ownership you have in your home net of any loans outstanding.
You can calculate your home equity by having your home valued (at market prices) and subtracting your outstanding mortgage balance (plus any other liabilities, like a home equity loan).
For example, if you have $100,000 left on your mortgage and the appraised market value of your home is $400,000, your home equity equals $300,000.
So, given this huge locked up wealth in your home, what now?
If you are short on funds to live off, you have two solid options to choose from.
The Pensions Loan Scheme or Reverse Mortgage
This is a form of 'reverse mortgage' offered by the federal government.
Basically, it allows borrowers, (over Age Pension age), to receive a tax-free fortnightly income stream by taking out a loan against the equity in their home.
A reverse mortgage works a little like a home loan in reverse. It's a loan that allows you to borrow money against the equity (or value of a property less any mortgage debt) you have in your home.
The Pension loan Scheme has been around for about 30 years; however, few retirees know about it and even fewer have used it. This was largely due to some restrictive eligibility rules.
But all that changed from 1 July 2019, when new rules expanded its eligibility criteria and withdrawal amounts.
Downsizer Contribution to super
This is a very strategic option, and again, not many retirees are aware of this option.
Broadly speaking, downsizer contributions allow those who are over 65 to sell or dispose or an ownership interest in their primary residence and make up to a $300,000 contribution to superannuation which we know can be the gift that keeps on giving.
Either way, these options are not a one size fits all, hence, speak with your financial planner, accountant, or other trusted advisor to ensure the right course of action is undertaken.
At Parkside, we can help you align your aspirations and values with a financial plan so you can meet your retirement goals.
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