Use home equity to boost retirement income
The roof over your head may be able to help you enjoy a richer retirement. Paul Clitheroe explores three possible strategies.
About Paul Clitheroe
Paul Clitheroe is Chairman of InvestSMART. He has been a media commentator for more than 30 years and is regarded as one of Australia's leading experts in the field of personal investment strategies and advice. Paul hosted the Channel 9 program Money, helped establish Money magazine, where he now acts as editorial adviser, and is the author of several personal finance books.
Paul is also chairman of Ecstra and the Ensemble Theatre Foundation. He is also the chair of Financial Literacy and Professor with the School of Business and Economics at Macquarie University.
It’s easy to see why Australians are so keen on residential property. Despite high interest rates and a cost-of-living crunch, home values have continued to rise, climbing 4.7% in 2024 according to PropTrack.
Pushing out the lens a little further, since the start of the COVID pandemic in early 2020, home prices have skyrocketed, on average across Australia, by 45%.
Many of Australia’s four million retirees have owned their homes since long before the pandemic. Years, potentially decades, of home ownership has left the nation’s retirees sitting on $1.3 trillion worth of home equity – money that could be used to boost retirement incomes.
Yet senior Australians have shown they aren’t keen on cashing in their equity. It highlights how superannuation and non-super investments remain critical parts of the retirement picture.
It’s possible to tap into home equity without the need to sell a home. A small number of lenders offer “reverse mortgages” – loans that let homeowners borrow against home equity, with the debt plus accumulated interest repaid when the owner either dies or sells the place.
It sounds good, and by law, homeowners can’t end up with negative equity (where the debt plus accumulated interest outweighs the property's value).
Even so, reverse mortgages have never really taken off in Australia, and the number of lenders offering this product has narrowed over the past decade.
An alternative is the Home Equity Access scheme. It works in much the same way as a reverse mortgage though the loan is funded by the federal government.
The scheme charges interest of 3.95%, which is well below commercial home loan rates, and the loan funds can be taken as regular payments or lump sums.
Not only are Home Equity Access payments tax-free, but the scheme is also open to self-funded retirees.
Again, it all sounds promising. And the past few years have seen a rise in the number of people signing up for the scheme (think cost-of-living crunch). Still, only around 13,400 retirees have accessed their home equity this way.
This brings us to another possibility – downsizing. If you’re 55 or older, you can use the sale proceeds of your old home to make a non-concessional (untaxed) super contribution of up to $300,000.
If the home is owned jointly, both owners can claim a downsizer contribution. For a couple, this could add an extra $600,000 to their combined super savings.
The thing is, remarkably few people choose this option. In the 2023-2024 financial year, only 13,000 Australians made a downsizer super contribution. For context, 7.5 million Australians are aged 55 years and over.
It’s easy to assume retirees shy away from downsizing because of the substantial costs involved. Downsizers in Sydney, where the median home value is around $1.1 million, will drop around $44,000 on stamp duty alone when they buy a new place.
Added to this is the possibility that a newly enlarged super balance could reduce age pension payments – or see them scrapped altogether if a person is suddenly classified as a self-funded retiree.
Here’s the rub. Research by the Australian Housing and Urban Research Institute (AHURI) found financial concerns about downsizing impact the decisions of just 16% of retirees.
The reality is most people simply want to stay in a much-loved home, and the decision to move is more likely to be triggered by a health shock that forces the transition to aged care rather than as a result of any government incentives.
Retirees have always faced various financial challenges – a very modern concern is fear of running out (FORO). Close to one in two Aussies believe they could outlast their retirement savings, according to a survey by Vanguard.
As a result, plenty of retirees stick close to minimum drawdowns from super. Many of them do this while living in a home that could be worth a lot more than their accumulated super savings.
As a recent report by the Actuaries Institute puts it, retirees often prefer to hold onto their home “to grow ‘richer’ while subsisting on a low income”.
What is the point of being “rich” if we don’t allow ourselves to enjoy that wealth – especially in retirement?
For today’s home-owning retirees who may be living a more frugal lifestyle than necessary, I would encourage you to think about ways to use your home equity. Yes, we all want to leave something behind for the kids, though no adult child would begrudge their parents a quality retirement.
For Australians still in the workforce, the situation highlights the importance of adding to your super where your budget allows it, rather than relying solely on employer contributions, and steadily growing a portfolio of non-super investments.
This can sound like a tall order given cost-of-living pressures, however, the steps you take today will provide choices later in life.
Having a pool of different investments allows each of us to decide which assets we will draw on to fund our personal retirement dream.
This article first appeared on InvestSMART. You can sign up to get a free newsletter, with fortnightly insights from InvestSMART’s team of experts including Paul Clitheroe and Effie Zahos.
Author Paul Clitheroe
Chairman, InvestSMART
