A common question we get asked is “If I have an existing reverse mortgage am I eligible for the Pension Loans Scheme (PLS)?” In short maybe, but there are particular issues you need to be aware of and consider before applying.
Over the past few months we have had thousands of seniors approach us wanting to learn more about the PLS and whether the revised rules could assist them. Within this group we have had a large number who have an existing mortgage as well as those who have a ‘reverse mortgage’.
What is a reverse mortgage?
In very simple terms, a reverse mortgage works in ‘reverse’ to a normal mortgage where you are required to make regular (e.g. fortnightly or monthly) payments to the lender of principal and/or interest on the loan.
In a reverse mortgage, you are under no legal obligation to make any regular repayments but you have to repay the loan in full when certain events happen. In the case of the PLS, you must repay the government in full when:
With the PLS, whilst there is no legal obligation to make regular repayments and no one from the government will hassle you if you don’t, if you wish to, you can make repayments of some or all of the loan at any time without penalty.
As a result of their no repayment structure, reverse mortgages result in interest compounding (i.e. interest is charged on interest as well as the loan proceeds) which over time reduces the net equity in your property - as shown in the table below extracted from our free Pension Loan Scheme Guide
Because of this compounding interest, it is generally not a good idea to add a new reverse mortgage on top of an existing reverse mortgage as this ‘doubles down’ on the compounding interest effect. Whilst the government doesn’t classify the PLS as a reverse mortgage, that is what it is in substance.
Notwithstanding the general cautionary statement above, Centrelink/DVA will accept existing reverse mortgages but only where you have substantial projected ‘net equity’, allowing for the existing reverse mortgage as well as the PLS, in your property. Generally Centrelink will not approve PLS applications where an existing reverse mortgage is 25% or more of the property’s value.
We recommend you check with your reverse mortgage lender prior to considering applying for the PLS, as we understand that certain commercial reverse mortgage providers may not support you applying for the PLS as they will not permit the government to lodge a caveat for the PLS against your title – the ‘caveat’ is how the government secures its PLS loan to you. Your reverse mortgage loan contract may also require immediate repayment if a caveat were to be placed on your title.
We also recommend you check your existing reverse mortgage net equity projections by accessing ASIC’s MoneySmart reverse mortgage calculator.
Our online PLS calculator generally does not suit seniors with existing reverse mortgages, except where you intend to use the PLS loan proceeds to pay the monthly interest on the reverse mortgage. If this is the case, we invite you to try our calculator now to see what additional regular cash flow is possible.