Are you a homeowner that is cash strapped and left confused about your retirement income?
Being strategic with your home when retirement is just around the corner means that you can actually unlock some funds in order to give your retirement fund a boost.
Owning a home is the Australian dream for many.
As the biggest asset many people will ever own, it can limit your cash flow options coming into retirement.
Here are some ideas you could look into in order to use your family’s home to enhance your retirement options.
Downsize for Retirement
Downsizing is an increasing trend that is driven by financial and lifestyle needs changing.
However, if you are wanting to come out of the process with some money left over, then it is important to put some thought into it before you start to shrink.
My widowed neighbour sold her family house of 50 years recently and purchased a two-bed apartment within a new development near a major shopping centre about five kilometres further away from the CBD compared to her previous house.
This move left her with around $400,000 and without a lawn to mow.
According to the accounting experts at Robinson Accounting, this is a decision that involves a little math. “Take a look at the sums on your acquisition or selling cost and make sure you are aware that downsizing to a property with higher land values such as one closer to a popular beach or the city could pose a risk. There might not be as much money left over as you may have thought for your retirement income.”
Another type of downsizing is moving into a retirement village, but it has very different ownership and legal outcomes.
It is very important to understand what your upfront costs will be, along with the ongoing monthly expenses and what you will receive when you leave the village.
I highly recommend that you have a solicitor review your retirement village contract to make sure that everybody is on the same page and that you thoroughly understand all of the terms of the contract.
Smaller Super Contributions
There have been recent changes to the superannuation laws that allow homeowners who are over the age of 65 to contribute a maximum of $300,000 from the sales proceeds of their house to their super funds when they are downsizing.
It is important for age pensioners to be aware that if they do this, it turns a means test-exempt asset (principal house) into a means-tested asset (super when over age 65).
This can reduce their age pension entitlements and retirement income substantially so it’s important to think carefully.
Personal Property Developments
A personal property development could be the answer for you.
Subdividing a block and then selling part of it may be a possibility for some people and for others they might want to develop the property on their own.
Selling part of a block might result in you losing control over something you built in your own backyard while you were building a new townhouse or unit on your land.
It will involve taxation and legal considerations and there is a lot of work involved in finding the right builder and designer and then being able to live through the entire process.
For the home restoration experts at Campbelltown Guttering, a personal property development will need some serious consideration. “Undergoing this kind of property development, especially if it something you haven’t done before, can be a very risky type of retirement venture, especially when prices on real estate are volatile. So it’s worth being mindful of all the factors, it might be something that could generate loss instead of profit.”
Granny Flat Interest
If a person – usually a relative or parent – pays you to have the lifetime right to live in your house or in a self-contained building that is on your property, it creates what is called a ‘granny flat interest.’
These arrangements can be paid in several different ways, and there might be age pension implications for whoever is moving into a granny flat arrangement.
Before you create a granny flat interest it is strongly recommended that you obtain legal advice so that the relationships, as well as obligations and terms are put in writing.
It is critical to document what happened in the event that the granny flat interest was to end prematurely.
Reverse Mortgages or Pension Loans
The four large banks have withdrawn from offering new reverse mortgages. But this means that the smaller banks have stepped up in this department.
The terms and interests will vary slightly from one provider to the net, but all reverse mortgages have one thing in common which is you are borrowing funds you most likely will not be making interest payments on.
This interest compounds and the family home’s proceeds, which is what the loan is secured again, is reduced by the accrued interest and outstanding borrowed amount and the time the house is finally sold.
Also, there are products called home reversion schemes (also sometimes called unlock or equity release) where a homeowner sells a share of their future sale proceeds from their home in exchange for receiving a lump sum now.
For the property financial experts at Concept Bookkeeping, this could be a smart yet tricky move. “A lump sum that is received today is less than what the current value of the home is and it is very important that the complex reasonings and calculations that are used in those contracts are thoroughly explained and understood by everyone involved.”
The Pension Loans Scheme (PLS) offered by the Government is similar in many ways to a reverse mortgage.
Money is borrowed and interest accrues and may be paid back once the house is sold. The PLS interest rate is 5.25% per annum. This rate is lower than what most reverse mortgage providers charge.
It is very important to be aware that borrowings made under the PLS only cannot be taken as a lump sum, but only as fortnightly income payments.
The expansion of this scheme, which begins on 1 July, will make these loans accessible to all self-funded retirees (previously some were excluded) and increase how much money may be borrowed.
A full rate pensioner will have the ability to borrow up to a maximum of 50% of their yearly pension payments and self-funded retirees and part pensions will be able to borrow higher amounts.
Not many people have taken up PLS to date, but it might become more popular as the new changes go into effect and some of the people’s concerns about those products might be eased by the Government acting as the lender.
You only have one life to live, and if getting something now but having to give something away in the future means you can have a better life right now, then no one is in the position to judge.
It is completely a personal choice for you to make for yourself and your retirement income future.
Renting The House Out
There might be options to earn some extra money by renting a room out from your house or using a platform like Airbnb to make your house temporarily available.
Swapping houses with interstate or overseas visitors when arranging your holidays can be a win-win situation as well when trying to keep your expenses as low as possible in retirement.
You could also think about renting out your garage or driveway if you are not utilising it fully and you live close to a busy sporting ground or station.
Websites like parkhound.com and spacer.com will advertise your space and you could earn $100-$150 extra a month depending on what the supply and demand are in your area.
Do you have any other smart ways to earn extra retirement income from your house?
Have you tried out any of the above suggestions?