The Pension Loan Scheme (PLS) has been around for about 30 years, however it wasn’t until some big changes made on the 1st of July last year (2019) that expanded the eligibility criteria and withdrawal amounts were introduced that people started to take more notice of it. Under these changes, many more people of Age Pension age will be able to apply to use this reverse mortgage style scheme to gain access to extra income by borrowing against the equity they have in their home.
It can be a great way for Australians who are in the retirement stage of their life and of Age Pension age to be able increase their cashflow, especially as some Australian’s may find that they are asset rich (with the family home) but cash poor. This scheme allows them to access some of their asset in the family home to fund their lifestyle in retirement.
How does it work?
The PLS essentially works in a similar way to a reverse mortgage except that the loan is offered by the federal government, allowing borrowers of Age Pension age to receive a fortnightly income to supplement their retirement income by taking out a loan against the equity in their home. It is flexible in the way that the payments can be made for a short period of time or may be for an indefinite period, however you choose to use it.
This loan can be repaid in full or part at any time, the full amount of the loan plus interest owed at the time of the death of the person will be recovered from the person’s estate.
Who is eligible?
To be eligible for a loan under the PLS, you must meet all of the following. You:
How much can I get?
Under the PLS you can receive fortnightly payments which top up your current pension amount (whether you receive some pension or nil pension) to 150% of the maximum rate of pension which applies to your circumstances. If you don’t want the full 150% you can nominate a lower amount.
This means that full Age Pensioners can borrow up to 50% of the maximum rate of the fortnightly Age Pension (including supplements) and part Age Pensioners can withdraw fortnightly payments up to a maximum of 150% of the full Age Pension less the amount of their current fortnightly payments.
How does it differ from a normal reverse mortgage?
One of the main differences is that there are no lump sums with the PLS as it is an ongoing income stream instead. Therefore, it may not be suitable for people who are looking to gain access to a larger sum of funds quickly.
Another point of difference is that the loans are from the government rather than a financial institution. This can be seen as a good thing for a lot of people who feel more comfortable dealing with the government.
Interest rates are generally lower than comparable reverse mortgages. The current rate for the PLS is at 4.5% pa. There are also no establishment or monthly fees with the PLS. This differs to most other mortgages. Centrelink may, however, charge costs (including legal fees). The Centrelink costs are determined after the loan application is maid and can be paid immediately or added to the outstanding loan balance.
As always, if you have any questions feel free to email me at firstname.lastname@example.org
Zac is a qualified financial planner at Pekada and host of the Wealth Collective Podcast. Living in Melbourne, Zac has six years of experience in advice and specialises in wealth accumulation and protection strategies. He loves to keep his finger on the pulse for the best strategies for wealth accumulators looking to build and protect their wealth tax effectively. Zac has been featured as an expert in Money Magazine.