25 Nov 2013

The Coalition should consider the merits of a federal home equity-release scheme that lets retirees access the equity in their home to pay for some of the government services they use, the Productivity Commission (PC) has suggested.

Even withdrawals limited to half of the real capital gain of a dwelling would make a large difference to government expenditure, the Commission said in its An Ageing Australia: Preparing for the Future report released late last week.

The PC has suggested that such a scheme could be used by homeowner retirees to pay for currently government-funded expenses such as aged and health care costs as well as health insurance premiums.

An example of the way it would work is as follows: suppose a retiree has a $500,000 house which appreciated by $15,000 in any one year, half of that could be used to pay for aged care services where the government was the funder.

The Commission said that “this would still leave retiree homeowners with an appreciating asset and at the same time alleviate the fiscal pressure on the government.”

$38 billion budget relief

Reverse mortgages, offered by private lenders, are currently the most well-known equity release scheme. They let homeowners borrow money against the value of a property for whatever goods and services they may choose. No repayment of the mortgage is required until the borrower dies or the home is sold.

The Commission’s idea is different because the equity released would pay for government-funded services, and still lets people have an appreciating asset and to retain their home.

The report does not spell out the details of an equity withdrawal scheme, as that the exact design would be up to government.

The Commission said that there is potentially $5 billion available to help fund health and aged care services in 2020 if house prices maintain their current rate of increases.

“House prices have risen over time in real terms, a trend that is likely to continue,” the report said.

By 2060, such households would potentially be able to contribute around $38 billion (in 2011-12 dollars), which would represent around 32 per cent of the projected public cost of these services given current policy settings.

An Ageing Australia: Preparing for the Future found that Australia is facing a major slowdown in its growth in national income per capita and productivity outlook at the same time that ageing will start to make major demands on the budgets of all Australian governments.

It proposed a number of actions that if early, can make the “transition to an older Australia easier” and alleviate strain on the government’s balance sheet.

Written by Avish Teckchandani for the Asian-Pacific Banking and Finance Journal.

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