Overview of Changes
The Pension Loans Scheme (PLS) allows older asset-rich, cash-poor pensioners to borrow money from the government against their homes to support their income whilst in retirement.
Since 1 July 2019, there have been big changes to the PLS, with new rules regarding the eligibility criteria and withdrawal amounts:
- The enhanced Pensioners Loan Scheme will now be open to full aged pensioners and self-funded retirees with securable real estate assets (essentially anyone above age pension who owns a home). Previously only eligible pensioners were able to access the scheme.
- The amount available to be borrowed has increased to up to 150 per cent of the maximum fortnightly pension rate.
How It Works
Each fortnight, a pensioner is paid an agreed amount, and interest is added on the outstanding loan balance each fortnight until it is repaid in full (when the home is sold). Payments continue until the balance of the loan reaches the maximum loan available. You can choose the amount of loan you get fortnightly. This amount can be up to 150% of a full Age Pension.
Unlike normal commercial reverse mortgages, lump sums are not available under the PLS. PLS loan debts can be repaid in full or part at any time, however, they are generally repaid when the home used as security is sold, usually as part of the winding up of your estate.
Under the updated PLS, home-owning retirees on the full age pension and eligible self-funded retirees will be able to borrow up to $36,000 a year for a single or $54,000 for a couple.
The interest rate is 5.25 per cent compounding on the outstanding loan amount compared to 6.54 per cent on a commercial reverse mortgage.
The big potential disadvantage from any reverse mortgage (including the government scheme) is that compounding interest rates can take a big bite from the estate when the borrower dies and the outstanding loan is paid.