DATE OF ISSUE:  8 DECEMBER 1993

HOME EQUITY CONVERSION LOAN SCHEME

Departmental Instruction no. B64/93 concerning the Home Equity Conversion (HEC) Loan Scheme was recently circulated to Branch Offices.

2.Following advice from the Human Rights and Equal Opportunity Commission, DSS has reviewed the eligibility criteria for the loans to now include all pensioners aged 60 years and over.  Additional information concerning the loan conditions has also been provided by DSS.

3.The eligibility criteria and loan conditions are contained in Attachment B of the abovementioned Instruction.  A replacement Attachment B reflecting the correct eligibility criteria and additional information is attached.

4.In light of these changes, amendments have also been made to the Service Pension and Home Equity Conversion pamphlet, text of which is at Attachment A.  A replacement Attachment A is also attached.

KAY GRIMSLEY

ASSISTANT SECRETARY

INCOME SUPPORT BRANCH

ATTACHMENT A

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 in one or more payments.  Each payment is referred to as a "drawdown".

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 sold; 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 at least 60 years of age and getting any Veterans' Affairs pension.

If you have a partner, your partner must also be at least 60 years of age and getting a Veterans' Affairs or DSS pension.  Veterans' Affairs pensions include age, invalidity, partner and carer service pension, disability pension and war widow/er's pension.

When you apply for the HEC loan you will be required to pay an application fee of $30.  Your fee will be refunded if the loan is refused, but will not be refunded if you withdraw your application.

After you apply for the loan you will be required to get independent financial advice.  An independent financial adviser is any solicitor, accountant or licensed financial planner who is not associated with DSS, DVA or the Advance Bank.  While you must pay for this advice, the Government, through the Advance Bank, will reimburse you up to $150 whether or not the loan proceeds.

If you and your partner borrow under the scheme, both your names must be on the title deed of your home.  If it is necessary to add your partner's name to the title deed, the Government, through the Advance Bank, will reimburse you up to $100 towards the cost of registration fees.

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.

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.

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

January 1994

ATTACHMENT B

SCHEME ELIGIBILITY AND CONDITIONS

Eligibility

1.Under the scheme all pensioners over 60 years of age in the following groups are eligible to apply:

• All DVA pensioners (service [age, invalidity, partner and carer]; working rule 'B', AMS, disability and war widow/er);

• DSS pensioners;

• recipients of Mature Age Allowance or Mature Age Partner Allowance.

2.In the case of pensioner couples, both partners must be either DVA or DSS pensioners and aged 60 or over to be eligible.

Loan Conditions

3.An application fee of $30.00 will apply.  The fee will be refunded if the bank refuses the loan, but not if the application is withdrawn by the applicant.

4.After applying for a loan, but prior to signing the loan documents, applicants will be obliged to get independent financial advice.  The advisor must also witness the Loan Agreement and mortgage documents on behalf of the applicant.  The advisers fee must be paid by the applicant, but it will be reimbursed by the Government for an amount of up to $150.00.  The reimbursement will be through the Advance Bank.

5.It should be noted that a DSS Financial Information Service officer cannot act as an independent adviser.  An independent adviser is any solicitor, accountant or licensed financial planner who is not associated with DSS or DVA or the Advance Bank.

6.Where couples borrow under the scheme the names of both partners must appear on the title deeds of their home.  The costs associated with land title registration fees will be reimbursed up to $100.00 for couples who need to add the name of one partner to the title deeds.  This reimbursement will also be through the Advance Bank

7.A person can take out one loan in a twelve month  period.  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.

8.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.

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

10.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.

11.However, borrowers may repay the loan at any time if they wish.

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

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

Interest

14.The Government subsidised concessional interest rate charged for HEC loans will be the same as the standard variable owner-occupier rate charged by the Advance Bank.  This rate changes from time to time and loan applicants should check with the bank.

15.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

16.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

17.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

18.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.

19.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.