Q. We are struggling to meet our daily living expenses as a result of the dramatic fall in Term Deposit rates available.  I have been told that the government has a reverse mortgage facility that is available to Age Pension recipients.  Is this correct? My wife is and I are both 79 years old and our home is worth about $1 million.

A. The Pensions Loan scheme (PLS) is broadly available to retirees of Age Pension age who own Australian property and meet Age Pension eligibility requirements.

Important changes to the scheme took effect from 1 July 2019 that mean more people will be eligible to apply and the amount you can apply for has increased.

The PLS operates like a reverse mortgage.  Typically it suits older Australians who are asset rich but income poor. Unlike a conventional reverse mortgage, pensioners cannot borrow a lump sum, rather it is paid on a fortnightly basis.

Under the PLS, recipients are able to supplement their fortnightly pension up to a maximum of 150% of the maximum fortnightly Age Pension rate including pension and energy supplements and also any rent assistance.  If you and your wife currently received a combined fortnightly Pension of $1,407, you would be able to receive a combined additional payment of up to $703 per fortnight as PLS payment. The PLS will continue to be payable until the recipient reaches their maximum loan amount.

The maximum loan depends upon your age when you apply for a loan, the value of your property and how much equity you would like to retain in your home.

The maximum loan amount is broadly calculated by applying a factor based on the age of the youngest owner of the property multiplied by the value of the property divided by $10,000.  As you are both aged 79, the calculation would be $4,380 x $1,000,000 divided by $10,000 =  $438,000.

If you wish to retain greater equity in the property to be guaranteed to your estate on your death, then the portion you wish to retain would not be factored into the calculations.  For example, if you wanted to retain $300,000 of equity, the maximum loan would be $4,380 x $700,000 divided by $10,000 =  $306,600.

The maximum loan is not fixed and can be varied as your circumstances change.  Existing PLS recipients are eligible to extend their loans up to 150% of the maximum fortnightly Age Pension rate subject equity and age restrictions.

Interest accrues against the debt until the loan is repaid.  The current interest rate charged is 5.25% per annum (capitalised fortnightly)  and has remained unchanged since December 1997.

You are responsible for paying all costs associated with the loan e.g. legal fees.

The loan is generally repaid from your estate on the death of the surviving spouse, however, if you receive a windfall gain such as an inheritance or sell the property you can repay the loan all or in part at any time. The outstanding loan balance will comprise the principal loan amount plus accrued interest plus costs minus any amounts already repaid.

Top up pension payments received from a PLS are not assessed for income or assets test purposes.  Payments received do not count as taxable income nor are they counted towards taxable income in calculating Senior and Pensioners Tax offset or the Low Income Offset.

Before deciding to establish a PLS, there are a number of issues you should consider:  You will be reducing the equity in your home as a consequence of the amount you borrow.  You need to consider the impact of the compounding effects of the interest costs over time.  If you need to move into an Aged Care facility, you may impact your ability to pay future accommodation costs.  You also need to consider the consequences for the surviving spouse if they do not have title to the property or are not a beneficiary of the property.

Contact a Financial  Information Service officer at Centrelink to determine the next steps or visit www.humanservices.gov.au.