Below are media releases, articles & submissions to the government that are all good reading & may be of interest to you
THE Productivity Commission's recent report Caring for Older Australians and a similar inquiry in Britain by the Dilnot commission looked at the rising cost of aged care and have come up with similar observations and recommendations.
Both reports clearly identify that governments have an aged-care cost that cannot be maintained. Elderly people requiring assistance to live independently at home, or requiring residential care, will need to co-contribute to their costs when their asset position exceeds a minimum level.
Here in Australia, elderly people entering low-level aged care (or high-level where extra services are provided) may be asked to pay an accommodation bond to secure their place in a facility. The residents cannot be left with less than $39,000 in assets after paying the bond. The bond is an interest-free loan to an aged-care provider, protected by recent legislation and fully guaranteed by the federal government..
About 63,000 of the aged-care residents have paid an average of $233,000 for an accommodation bond. For most, the sale of an asset (primarily the family home) has funded the cost of the bond. During the past six months we have seen various levels of hysteria about selling the family home to meet the bond costs. Many of these comments come from a lack of education and not knowing that most of the accommodation bond is returned to the estate and that there are other ways to pay the bond.
Many aged-care providers prefer a lump-sum payment of the bond and other options such as equity release of the family home or making periodical payments of the bond are not made known.
At present, there are three equity release products that contain differing structures.
A reverse mortgage can fund 25 per cent from the home value or a maximum of $250,000, as a lump sum or a progressive draw-down. Further regulations in the National Consumer Credit Protection Bill later this year will give senior homeowners greater protection, including the "no negative equity guarantee".
A home reversion scheme can provide up to 50 per cent of the security value. Will be regulated next year and involves a partial sale of a property at a discounted rate against a future value. Marketed as "debt-free" and difficult for many seniors to understand.
An accommodation bond loan specifically designed for the payment of bonds. Recently released and distributed by equity release specialists.
The payment of the bond by periodical payment is an important option not generally considered. For aged pension recipients there is considerable value in making part of the bond payable by such an arrangement. When a family home is rented, the rental income and the home will be exempt from the income and asset tests for aged pension entitlements, as long as periodical payments are maintained. The unpaid portion of the bond subject to periodical payment is governed by a maximum interest rate set regularly by government.
With a growing acceptance of "user co-contribution" towards the cost of care, and the option of equity release as a funding source, this is an opportunity to look at additional considerations.
The primary purpose of present equity release borrowers is repairs and maintenance to the family home. These costs are often taken up before aged-care needs. Seniors may have another 20 to 30 years in their homes after retirement, coinciding with reduced incomes.
A Victorian Department of Human Services study of 38,000 senior homes confirmed "fault" conditions involving 25 per cent "slip and trip", 21 per cent electrical, 14 per cent cracking and 11 per cent for roofing and drainage.
The Harmer pension review clearly stated governments would not be responsible for owner-occupied repairs and maintenance, but it is also clear governments cannot promote independent living if the home environment is unsafe and requires improvement. Too many seniors (66,000) are admitted to hospital every year from a fall (most in or around the house) at a cost of $566 million.
About 50 per cent of seniors have private health insurance.
Of the balance, 700,000 have home equity. Some form of encouragement from government for these homeowners to enter into or to maintain private health insurance would greatly reduce the budgetary stress of the public hospital system.
Who provides the equity release? More than 45,000 retirees are borrowers of equity release through existing lending institutions. It would be inappropriate for government to suddenly become a "banker of retirees" particularly in light of recent adventures into other commercial-style activities.
The government's best assistance is to direct the Australian Office of Finance Management to ensure there is enough money available for existing and new lenders to meet demand.
During the past four years it has been evident from local and overseas research that equity release will be a key consideration for seniors funding the needs of their later years and that the aged and healthcare industries would be significant contributors for assistance and information
Caring for Older Australians
Productivity Commission
PO Box 1428
Canberra City ACT 2601
This submission is made on behalf of FORTUS - a national association of Equity Release specialists – and the third party distribution channel of Reverse Mortgage products.
Equity Release is available in two forms
a) Reverse Mortgage – a loan to a borrower generally over the age of 63, using the equity in a residential property, and requiring no regular repayments until the death of the last remaining borrower, sale of the property, or 6 months after the last remaining borrower permanently leaves. Lenders have slightly differing versions of the above conditions.
b) Home Reversion Scheme – this is a partial sale of a residential property, requiring no regular repayments, and is repaid with a share of the capital growth.
Equity Release allows older home owners to use the equity in their home for any general purpose. All borrowers are required to seek independent legal advice on the terms and conditions. Some lenders also require independent financial advice.
The 65+ age group will double over the next 30-40 years. There are currently 5 tax payers for each person over the age of 65, and this will diminish to 2.5 tax payers in the same period.
Many reports have been released over the cost increases in meeting the needs of the elderly, either living in their own homes or in Residential Aged Care (RAC), and the need for alternate systems to address these issues.
This submission not only supports the appropriate use of Equity Release as a legitimate financial retirement tool, but wishes to present various recommendations arising from an understanding of the Australian seniors market, whereby changes to Government policies and the principle of the “user pay’ option will challenge existing concepts to produce an improved future for this sector.
Equity Release
Overseas Trends in Equity Release
USA – The Reverse Mortgage industry showed enormous growth from 2004-2007, volumes reduced in the following two years and is now returning towards former levels. The amount that can be borrowed is higher than in Australia and there are higher ingoing costs. These costs are reflective of the fee charged by the Housing and Urban Development Department (HUD) to cover the cost of the “No Negative Equity Guarantee”. This guarantee ensures that the loan amount payable by the borrower or the estate shall never be greater than the security value. In a move to place better controls into the market and develop market usage, HUD is releasing a new product which has a lower borrowing ratio and minimises the upfront cost.
Seniors associations in the US have taken a more pronounced stance on Reverse Mortgages, in comparison to their Australian counterparts. Both the American Association of Retired Persons (AARP) and National Council on the Ageing (NCOA) have produced strategies for providing a “neutral advice” position on the product. HUD has recently legislated that the NCOA’s booklet “Use your Home to Stay at Home” is now a mandatory issue to all borrowers before they proceed with an application.
In our submission to Treasury’s consultation on Stage 2 of the National Consumer Credit Protection Bill, FORTUS recommended the Federal Government assess the US position of a lower ratio product, based upon
- A “No Negative Equity Guarantee” be introduced by Government, using a higher entry age of 72 years,
- A maximum borrowing of 20%, consisting of 7% lump sum and the remaining 13% for regular monthly supplement to retirement income.
The borrowings would be funded through current or future Equity Release lenders.
UK – The Joseph Rowntree Foundation conducted a research project in 2007/8 which indicated many seniors are unable to support themselves in retirement, particularly in terms of meeting the costs of repairs, maintenance, and health-care at home. Together with 3 Boroughs and an Equity Release specialist firm, they have commenced an 18 month trial program. This program has provided home-care and health-care workers at the 3 Boroughs with a general understanding of Equity Release and, if they believe a home-owner may benefit, provide a brochure of introduction for the owner’s follow-up.
The overall industry is showing a 36% increase, as Equity Release is now being seen as a legitimate financial tool in retirement planning.
Australia
Income for a Modest Standard of Living and How much is needed
The full Aged Pension (Aug 2010) provides a single recipient, owning their own home, with approximately $18,200 per annum. The ASFA study into retirement standards estimates a required income of $19,980 for a modest living. The ASFA budget indicates a shortfall of $1780 per annum and does not include costs for such items as vet costs, animal food, internet and health insurance.
When a family home is valued at a base level of $300,000 (median house price is $457,000+ - RP Data) and has a capital growth of 3.5% per annum over a 10-20 year period, there is an increased value of $10,500 + per annum. A senior home owner taking up Equity Release would achieve a far better standard of living with an increase of $100 per week ($5,200 per annum) set over a 10 year period, whilst still having the same amount of dollar equity in the family home some 15-20 years later – based upon an average interest rate of 9.5% (currently 8.15%).
How Safe are our Seniors Homes?
An 8 year study of 37,170 homes in Victoria (mainly seniors) found the following faults by category –
Trip and Slip 26%, Cracking 14%, Fire Hazards 4%, Stumps/Piers 8%, Health Hazards 6%, Illegal Works 2%, Electrics 21%, Timber Rot 10%, Security 5%, Damp Mould 7%,
Roof 11%, and Drainage 11%.
Whilst Governments are finding more reasons to support our seniors in their homes, how confident are we about the conditions in which they live, based upon the above.
The Harmer Review into the Age Pension indicated the Federal Government is not responsible for the repairs and maintenance of the family home.
The available options for many seniors are to sell and downsize (recent study indicated less than 10% favour this option), sell other assets, go back to work, borrow from family or friends, allow the home to deteriorate, or access equity.
Recommendations for Government Policy
Funding of Home and Community Care Program (HACC)
The 2009/10 expenditure for this program was just under $1.95b. We estimate $300m can be saved if the current HACC fee structure can be changed to be inline with the Aged Pension entitlements. For example to qualify for the medium fee for service, a senior couple can earn up to $95,374, before they move to the high fee rate. In comparison, the Aged Pension for a couple cuts out at $61,620. Additionally, when earning up to the $95,374 limit, a couple would only pay 57% of the Full Cost Recovery for Planned Activity Group costs, 15% for Allied Health Services, 46% for domestic services, 38% for property maintenance, 24% for personal care, 13% for respite, and 28% for nursing.
If HACC recovery costs are brought back closer to the Aged Pension structure, the $300m estimated savings could be transferred to the aged care sector. Based upon the 158,863 beds, the savings would relate to an increase of $5.13 per bed/day. A funding increase of this magnitude would assist many aged care providers to maintain profitability and improve services.
Accommodation Bonds
We have yet to see the promised legislation regulating aged care providers in terms of Accommodation Bond investment. Although the Federal Government is guarantor for $9.1b of Bonds, the industry and residents need guidance in this regard.
Not enough prior education is available to residents and their families in understanding Bonds. For example, many aged care providers recommend the family home is sold to pay for a lump sum Bond. Consumers are often unaware Equity Release can be accessed to pay for the lump sum and/or periodical payments. Additionally they are unaware that if all/part of the Bond is paid periodically and ongoing, the family home may be rented out and the house is exempt from the Assets Test and the rental income from the Income Test for the purpose of the Aged Pension.
The Investment of Accommodation Bond Funds by Aged Care Providers.
Of the estimated $9.1b of Bonds, it is estimated about 30% is retained in liquid assets for the return to residents at the time of their leaving the facility, or to their estate.
The balance of funds is invested and the return on the investment is required to be used for improvements to the facility or debt reduction.
For private providers it is recommended the income generated by the investments be deemed as non-assessable via amendment to the Tax Act. This amendment would provide private sector facilitators greater scope in remaining profitable and alleviating some of the funding pressures currently experienced. If private providers represent 35% of the industry but for say 40% of Bonds, the $2.54b invested at the Government Bond rate of about 4.95% is a return of $125.7m, of which 30% (company tax rate) is further retained under non-assessable income. This would equate to $4.30 per bed/day, for the 40% of Bonded beds.
Equity Release Legislation
In stage 2 of the NCCP legislation we recommend
a) all Equity Borrowers are required to seek the independent advice from a solicitor of their choice and address issues of “estate planning” (Wills and Enduring Powers of Attorney) as part of the process.
b) the use of Equity Release for funding investment into financial service products, such as annuities, be prohibited ie no crossing-selling using Equity Release.
Recent Paper
Access Economics Paper-
Access Economics recently completed a public policy discussion paper (The Future of Aged Care in Australia) prepared for National Seniors Australia. The paper examined the following categories
- Current arrangements
“The government pays for residential and community aged care through general tax revenue”. The ageing of the population makes this current arrangement impossible to continue in future years.
- Long term care insurance
Premiums paid by future potential users (and subsidised by low-income earners) to private insurers, the capital resources would need to be considerable for possible claimants over the next 10-20 years
- Healthy ageing savings accounts
Designed to contributing to a savings account throughout a income lifetime, and will take many years to build a sufficient base.
- Reverse Mortgages
Certainly relevant to current senior home owners using their asset to meet aged care needs over the next 10-20 years before other options may become available.
- Vouchers
Based upon government funding for seniors to pay for aged services of their own
choice.
- Combinations
Varying combinations were presented as a means to find an effective system, but seemed to have the overall positive effect for long-term policies.
The paper did not cover the use of Equity Release for the purpose of paying an Accommodation Bond, although Access Economics may be unaware of existing lenders and policies. When entering aged care (either low level or high level providing extra services) an ingoing resident may be asked to pay an Accommodation Bond, an amount which has no upper limit except that the resident must retain a net asset position of approximately $40,000.
Example
Recently a Melbourne couple (both aged pensioners) was due to enter aged care at the same time and both were asked to pay a Bond. The aged care provider asked their representatives for $750,000 – each, and it is believed that request was based upon knowing the couple had a family home valued at $2.3m+. They have now entered a facility asking for a $300,000 Bond each, and the sale of their family home has been saved through Equity Release. Additionally the bond was negotiated with a $280,000 lump sum and the balance to be paid periodically over a 5 year term. Under this arrangement, the couple is able to rent their family home, with the home being exempt from the assets test and the rental income exempt from the assets test.
Whilst the first aged care provider was within their rights to seek a total Bond of $1.5m, it seems to be a manipulation of guidelines, particularly as the wife was not as disabled as her husband and had some thoughts of returning to the family home in the future. Although this may not be practical, having to sell the family home and potentially lose the Aged Pension, would have been a psychological blow to this lady.
The possible options discussed by Access Economics (except for vouchers) all relate to a “user pay” principle whether it is an insurance policy, savings account or reverse mortgage. A “user pay” system is the alternative to either an increase to the income tax rates (any increase is opposed by many economists) or the consumption tax (GST). For those who own residential security (owner occupied or investment) a reverse mortgage is seen as preferred option with an immediate action, and this would appear ongoing until other recommendations/options become financially viable.
Government Direction
The Finance Department’s in-coming Government Brief of September 2010 made the following observations
“ There will be a need to address whether the “comfortably off” in the community (and their inheritors) should continue to have their health and aged care services subsidised to the current extent by taxpayers, many of whom are in less fortunate circumstances”
With the government taking up the responsibility for aged care, it “represents a significant long-term fiscal risk to the budget”.
“The government will need to consider co-contribution arrangements in this light, unless ways can be found to ensure users of aged care services make a fair and reasonable contribution to the costs of their care, and, in the case of residential care, their accommodation”. .
We note that the Brotherhood of St. Laurence, in its submission to this Inquiry and also the Harmer Pension Review, called for “government legislation to protect older people, so that they could use their equity in their home to provide for their needs”.
With over 75 % of senior Australians having equity in their own home, this represents an opportunity for Government to develop policies for aged care based more upon a “user pay” principle and allowing funding to be directed to areas of greater need such as rental subsidy and other assistance to those of low-income or disadvantaged environments.
On behalf of FORTUS we thank the Commission in accepting our submission.
Paul Dwyer
Melbourne and Peninsula Reverse Mortgages
Victorian Director – FORTUS
1st October 2010
About the RBS Reverse Mortgage Survey
June 2009: The RBS Reverse Mortgage Survey was conducted in December 2008 to provide unique insight into Australia’s $2.5 billion reverse mortgage industry.
Over 400 reverse mortgagees nationally were surveyed* to establish what is driving the use of reverse mortgages amongst Australian retirees; how the money from these loans is being spent and the impact the loans have on the lifestyle and overall wellbeing of the respondents.
The results from the survey have dispelled the ‘SKI’ (spending the kids’ inheritance) myth that retirees use reverse mortgages to fund extravagant holidays or to purchase unnecessary luxury items.
98% of the study's participants stated that they would recommend a reverse mortgage product to friends of family.
Most popular uses:
Home repairs - 32.6%
These were not grandiose renovations but more often minor repairs or alterations to make the property more suitable for retirement (e.g. ramps and handrails etc) often so the respondent could remain in their own home.
Common responses
“We have been able to make our home more livable as we get older. This is important to us”.
“My house has now increased in value due to repairs and renovations”.
Income - 18.7%
The aged pension is insufficient for many retirees who choose to take a reverse mortgage in the form of regular monthly payments or as a line of credit.
Common responses
“It completely turned my life around to have money for simple things at my age”.
“Bridge some of the affects of losing 25% of our SMSF in the stock market”.
Helping family - 6.6%
The ability to use their primary asset to help family members is becoming increasingly popular. Many retirees helped children afford a deposit on a house, paid for a wedding, or helped family to cover the cost of education.
Common responses
“Great being able to help two of our three children buy and renovate properties while we can still enjoy our home”.
“To ease the financial burdens of our young daughter”.
Rainy Day facility – 4.2 %
Many customers have set up a flexible drawdown, which acts like an overdraft or line or credit. This money is there for people when they need it.
Common responses
“Peace of mind knowing that of any major disaster happened I would be able to use the money to fix it”.
“The pension doesn’t cover repairs to the home. The worry of unforeseen expenses is gone”.
About Reverse Mortgages in Australia
Reverse mortgages, or senior equity release loans, were introduced to Australia in 2005. The loans allow people over 60 to borrow against the value of their home. Payments and interest are not due until they sell the home or permanently vacate it.
Statistics collected by RFI and self-regulatory body SEQUAL have found that as many as 31 per cent of Australian retirees expect to rely on their home as a source of retirement funding.
About RBS Reverse Mortgages
RBS Reverse Mortgages is a member of the industry self-regulating body, SEQUAL, and supports innovative and responsible lending to Australia’s seniors.
RBS' Reverse Mortgage has won Money Magazine ‘Best of the Best Reverse Mortgage" 2007, 2008 and 2009 and Your Mortgage Gold winner for ‘Best Reverse Mortgage – Bank’ 2007 and 2008.
Is it time to tax the rich?..
ANTHONY KEANE, MONEY EDITOR | March 08, 2009
MOTHERS and low-income earners need more benefits to build their retirement nest eggs, and rich retirees should help foot the bill, superannuation groups say. They say the Howard government's 2007 super reforms delivered big savings to high-income earners but little to the masses, and are calling for several changes to the system. In a joint submission to the Federal Government's tax system review, the Industry Super Network and the Australian Institute of Superannuation Trustees want the 15 per cent tax on super contributions scrapped for people on low incomes......................
Green left - Australia govt robs....
Govt robs ‘wealthy’ to pay pensioners
Graham Matthews7 March 2009
On February 27, the federal government received a report on the review of the pensions system conducted by Jeff Harmer, the head of the families and community services department.
While the results of the review have not yet been made public, speculation is growing that the government will fund increased payments to pensioners by cutbacks to those receiving a part-pension.
The February 27 Sydney Morning Herald revealed that the likely government plan is to raise the rate at which the pension is reduced for income earned (the taper rate).............................
Seniors world chronicle..
SYDNEY, NSW / The Sydney Morning Herald / National / February 26, 2009
By Stephanie Peatling
THE pension system is so badly organised that more than 50,000 people with disposable income of more than $60,000 receive the age pension and a further 14 per cent are paid the benefit despite their assets being worth $1.6 million...........................
