Q. I am 71 years of age and my wife is 68.  We are both retired in good health and both on the full age pension.

Like many we are asset “rich” and cash poor. Our home which we own has a current value of approx. $1.1m with enough cash in the bank to equate to 3 years living expenses. Like a lot of real estate our home value has dropped $200k in the last 3-4 years.

We are considering applying for an Equity Loan ( line of credit ) for say $200k . If we sold our home and repurchased for $600k the cash balance would exceed the assets test and reduce our pension payments.

Are our options best suited by staying in our current home, borrowing in the next 1-2 years when needing to or selling and re-purchasing now or then?

A. The great dilemma; when to downsize and what to downsize to.  The transaction costs of buying and selling property make it an expensive exercise, so it pays to do your home work.  You need to identify how much income you will require to live on.  Look at your bank account and Credit Card statements for the past 12 months to identify how much you have spent.  Once you have a clear idea of your present and future income needs, you will be in a position to understand how much capital you will need to “release” from your home for income purposes.

Capital can be released from your home in a number of ways; you can sell your home and purchase another which will meet your needs into the future.  You can borrow against your existing home using a conventional mortgage or line of credit provided that you can demonstrate to the bank that you can service the interest payments.  You can use a reverse mortgage, where interest accrues on the loan but is not required to be serviced.  You can enter into an equity release facility where there are no interest payments but the lending institution will take a greater share of your property on eventual sale.

Each option has positives and negatives to be considered.  In all cases, money borrowed against your family home and subsequently invested is assessed as an asset for Centrelink Assets Test purposes.  This differs from the treatment of money borrowed against investment assets such property, where the net asset value is assessed.

Base your decision on your current circumstances, future needs and your time frame.  Your best option will depend upon the cost of interest or lost equity under each scenario, also the costs of selling and buying your home and finally any impact on current or future Centrelink benefits.  Basing your decision on the future value of your family home is dangerous.  There are no guarantees; your property may not recoup the“lost” $200,000 in value over the next few years, it could also fall further in value.

The above Q & A was orginally posted in the The Australian