B64/1993 HOME EQUITY CONVERSION LOAN SCHEME

DATE OF ISSUE:  22 NOVEMBER 1993

HOME EQUITY CONVERSION LOAN SCHEME

INTRODUCTION

The purpose of this Departmental Instruction is to provide information about the Home Equity Conversion (HEC) Loan scheme.

BACKGROUND

2.In the 1992/93 Budget the Government announced that it would provide sponsorship of up to $10m a year for a scheme to provide small loans for certain DVA and DSS pensioners who have substantial equity in their own home.

LOAN PROVIDER

3.The Advance Bank of Australia will operate the HEC scheme and loans will be available from 1 December 1993.

4.The bank will provide loans each year of up to $5,000 for those under 75 years and $7,500 for those 75 years and over.

5.Although the Advance Bank is a regional bank based in NSW, southern Queensland and the ACT, the loans will be offered Australia-wide.  This will be done through its State offices in Melbourne, Adelaide and Perth.  A network of solicitors will act as agents in areas where the bank is not otherwise represented.

AIM

6.The scheme arose because, although many service pensioners own their homes, they have little income other than the pension and need money to modify their home, replace whitegoods, repair the car, etc.

PUBLICITY

7.The initiative was publicised in the September issues of Vetaffairs and Age Pension News.  An article will be included in the December edition of Vetaffairs.

PROCEDURES

DVA Role

8.DVA will have mainly a referral role in relation to administration of the scheme.  Pensioners seeking information on the HEC loans should be referred directly to the bank via the enquiries number 1800 05 1234, or in person at the nearest branch of the bank. The Financial Information Service staff in the Department of Social Security can also provide information on the loans.

9.The only procedure BO staff may have to undertake is to provide confirmation of a pensioner's eligibility for a pension, eg  type of pension and rate of payment.  This information may be requested either by the pensioner or the bank.

10.Home Equity Conversion pamphlets will be provided to BOs for distribution to pensioners enquiring about the scheme.  The text of the pamphlet is at Attachment A.

Applications

11.BOs will not provide application forms or accept applications from pensioners for loans.  Pensioners will have to contact the bank direct.

Legislation & Systems

12.No legislative or systems changes are required.

SCHEME ELIGIBILITY AND CONDITIONS

13.Eligibility and conditions of the scheme are at Attachment B.

14.Details on the scheme will be included in the GOSP.

CONTACT OFFICER

15.Liz Lambart is the Project Officer and can be contacted on (06) 289 6405.

KAY GRIMSLEY

ASSISTANT SECRETARY

INCOME SUPPORT BRANCH

ATTACHMENT A

TEXT FOR HOME EQUITY CONVERSION (HEC) PAMPHLET

Service Pension

and

Home Equity Conversion

While most service pensioners own their own home, many have little or no income other than their pension.

Home Equity Conversion (HEC) schemes enable you to convert some of the equity (value) in your home into cash, while you still live in the home.  You can receive the cash either as a lump sum and/or as a series of payments.

Defence Service Homes (DSH) loans and HEC loans must be secured by a first mortgage.  If you already have a DSH loan, you cannot access HEC schemes unless you discharge your DSH mortgage first.  This brochure outlines the schemes available, but if you want more detail on how these schemes may affect your pension, you should contact Veterans' Affairs (DVA) or the department of Social Security's (DSS) Financial Information Service.

There are four main types of HEC schemes:

• sale/leaseback agreement, involving the sale of your home while you retain a right to live in it for an agreed period;

• line of credit, secured by mortgage over your home, enabling you to "drawdown" payment(s) up to the value of the mortgage loan;

• home equity conversion loan, where you can obtain a series of small loans, using your home as security, but you retain a guaranteed residual equity and lifetime occupancy of your home; and

• reverse annuity mortgage, where you borrow against the home (secured by a mortgage) and use the money to buy an immediate annuity.

SALE/LEASEBACK AGREEMENT

Description

A sale/leaseback agreement allows you to sell your home for an agreed amount (which you may receive in one or more payments) but you retain the right to remain in your home for life or for an agreed period.  The title deed may remain in your name or may be transferred to the buyer's name, depending on the terms of the agreement.  You may also agree to pay rent while you continue to live in the house.

Under these arrangements you are paid an initial amount with the balance paid as a lump sum.  This lump sum is paid to you if you leave that house, or to your estate if you die.  Alternatively, the balance may be paid in instalments.

Income and Assets Tests Treatment

Lump sum payments you receive from the sale of your home are not counted as income.  However, the lump sum is counted as an asset until it is spent.

Your status as a "homeowner" for assets test purposes and your eligibility for rent assistance are explained in the "Service Pension and Special Residences" brochure.

LINE OF CREDIT

Description

A line of credit is secured by a mortgage over your home, enabling you to borrow lump sums or regular payments up to a limit, which is the value of the mortgage loan.  It is similar to an overdraft in that you may never actually use the total amount.  The line of credit is the maximum amount that can be obtained on one or more payments.  Each payment is referred to as a "drawdown".

Income and Assets Tests Treatment

The first $40,000 you borrow under a line of credit is not counted as income under the income test.  This $40,000 does not include bank charges and interest.

If you borrow more than $40,000, the extra amount is counted as income for 12 months from the date of receipt.

If you invest this borrowed money, any income received from the investment will be counted as income and used to work out your service pension rate.

The first $40,000 you borrow is also not counted as an asset under the assets test for 90 days after you receive it.  After 90 days, any amount borrowed by you, but not yet spent, will be counted as an asset.  Any money you borrow over $40,000 is counted as an asset until it is spent.  For assets test purposes you continue to be treated as a homeowner.

Any unused credit (ie any credit you have not yet "drawndown") is not counted as income nor as an asset under the income and assets tests.

Any repayment of your line of credit is taken as a repayment of the amount borrowed (before charges or interest is paid).  If you had borrowed more than $40,000, any repayment would reduce this excess amount first.

HOME EQUITY CONVERSION LOAN

Description

This scheme provides small loans for certain DVA and DSS pensioners who have substantial equity in their own home.  The Advance Bank of Australia operates this HEC Loan scheme.

The bank provides loans up to $5,000 a year (if you are under 75 years) and $7,500 a year (if ;you are 75 years and over).  Unless you breach the conditions of your loan, no repayment is required until:

• after your death (if you are married, after the death of both you and your spouse);

• your property is sole; or

• you (and your spouse) permanently leave the home.

Under this scheme you have guaranteed lifetime occupancy of your home.

The total of your loans cannot exceed the value of your home less $20,000.  This $20,000 is indexed to the CPI.  This means you have a guaranteed residual equity in your home of at least $20,000.

You will be eligible to apply for a loan if you are:

• a single DVA age service pensioner, ie a female veteran aged 55 years or more (see note below) or a male veteran aged 60 years or more; or

• a single DVA partner service pensioner, including a widowed or separated pensioner, who is a female aged 60 years or more (see note below) or a male aged 65 years or more;

• a pensioner couple provided that:

-the veteran is on age service pension, and

-the partner is female aged 60 years or more (see note below) or a male aged 65 years or more on partner service pension or DSS age pension.

(Note:Commencing 1 July 1995, it is planned to gradually and progressively lift the earliest pension age for females.  By 1 July 2013, the earliest pension age for veterans (both males and females) will be 60 years and for all other males and females will be 65 years.)

If you receive an invalidity service pension you are not eligible for a loan until you reach 60 years (female) (see note above) or 65 years (male).  If you receive a carer service pension you are not eligible to apply for a loan.

A HEC Loan operates like a mortgage, with the loan secured against your principal home.  Unlike a normal mortgage, however, you do not have to make ongoing repayments.  The interest accruing on your loan is simply added to the amount you owe.  The amount of interest charged by the Advance Bank is a concessional rate.

Income and Assets Tests Treatment

Loans obtained under the HEC Loan scheme are the same as "drawdowns" under the line of Credit scheme (see Income and Assets Tests Treatment on pages 4 and 5).  This means you can get loans totalling $40,000 before your pension may be affected.

REVERSE ANNUITY MORTGAGE

Description

The Reverse Annuity Mortgage scheme allows you to take out a loan, secured by a mortgage on your home, in order to purchase an immediate annuity.  This annuity then gives you a regular income.

Income and Assets Tests Treatment

Loans obtained under the Reverse Annuity Mortgage scheme are the same as "drawdowns" under the Line of Credit scheme  (see Income and Assets Tests Treatment on pages 4 and 5).  This means you can get loans totalling $40,000 before your pension may be affected.

The annuity will be subject to the assets test if purchased on or after 15 August 1989, otherwise any residual capital value or commutable value is an assessable asset.  Some of your annuity will also be counted under the income test.

Further information on annuities is contained in the "Service Pension and Immediate Annuities, Superannuation and Allocated Pensions" brochure.

Department of Veterans Affairs — November 1993

ATTACHMENT B

SCHEME ELIGIBILITY AND CONDITIONS

Eligibility

1.Under the scheme the following pensioner groups are eligible to apply:

• a single DVA age service pensioner, ie a male veteran aged 60 years or more, or a female veteran aged 55 years or more; or

• a single DVA partner service pensioner, including a widowed or separated pensioner, who is a male aged 65 years or more, or a female aged 60 years or more,

• a pensioner couple provided that:

  • the veteran is on age service pension; and

  • the partner is a male aged 65 years or more, or a female aged 60 years or more on partner service pension or DSS age pension.

2.A person receiving an invalidity service pension is not eligible for a loan until they reach 60 years if a female, or 65 years if a male.  If a person in receipt of an invalidity service pension wishes to take advantage of the HEC loan scheme and has not reached 60 years (female) or 65 years (male), when deemed to be an age pensioner, they would be required to request a change in their eligibility status from invalidity to age service pensioner.

3.Also, a person in receipt of a carer service pension is not eligible for a loan.

Loan Conditions

4.If a loan is approved, a person can take out one loan in a twelve month period.  It will be up to the bank to approve any further loans applied for.  An application fee of $30.00 will apply.  It will be refunded if the bank refuses the loan, but not if the application is withdrawn.

5.The total of the loans (including the interest on the loan) cannot exceed the value of the home less $20,000 (indexed to the CPI).  This means that the borrower will retain a guaranteed residual equity in the home of at least $20,000.

6.However, the guaranteed residual equity will not apply if a borrower remarries and adds the name of the new partner to the title deed.  In this situation, the borrower could eventually have no equity at all in the home.

7.A loan can be rolled over to a new home if the equity in the new home is sufficient to secure the loan.

8.No repayment of the loan is required until:

• after the death of the borrower (or if married, after the death of the borrower's spouse),

• the home is sold,

• the borrower (and his/her spouse) permanently leave the home, or

• the borrower breaches the conditions of the loan.

9.However, a borrower may repay the loan at any time if they wish.

10.Under the scheme the borrower will be guaranteed lifetime occupancy of the home.

11.A loan can be used to maintain the pensioner's home, or for any other worthwhile purpose approved by the bank.

Interest

12.The interest rate will be the standard variable owner-occupier rate charged by the Advance Bank - the same as for those buying their own home.  This rate changes from time to time and loan applicants should check with the bank.

13.No regular interest repayments will have to be made.  The interest accruing on the loan is added to the amount owed and will be paid back when the loan is repaid.

Income And Assets

14.Loans made under the HEC Loan scheme are the same as "drawdowns" made under the Line of Credit scheme for income and assets test purposes.  This means that a pensioner can borrow up to $40,000 before the pension is affected.  The $40,000 does not include bank charges and interest.  Proceeds of HEC loans are assessable under the assets test after 90 days from receipt of the loan.

First Mortgage

15.The bank will hold a first mortgage on the home, therefore, on the sale of the property, the bank will have first claim on the proceeds.  Unlike a normal mortgage, ongoing repayments do not have to be made.

Defence Service Homes Loans

16.It is not possible to have a loan from the Defence Service Homes and the HEC scheme at the same time because both the DSH loan and the HEC loan must be secured by a first mortgage, and there can be only one first mortgage.

17.A pensioner who wants to discharge a DSH loan and take a HEC loan can keep DSH insurance as long as he/she owns the house originally financed by DSH.