The Pension Loans Scheme (PLS) is the Government’s version of a reverse mortgage that offers those eligible an income stream to supplement their retirement income.
The PLS is a voluntary arrangement available to self-funded retirees, as well as full and part pensioners, which provides a loan in the form of fortnightly instalments.
Recipients must secure their loan with real estate owned in Australia. The loan amount is paid in regular fortnightly, non-taxable payments and is also exempt from both social security means-testing and aged care fee assessment.
The fortnightly payments can be up to 150% of the maximum fortnightly pension payment. For those who receive a qualifying payment from Centrelink/DVA, the maximum fortnightly amount will be the difference between 150% of the maximum pension payment and the actual pension payment being received (i.e. this would only be a top-up payment).
Much like a reverse mortgage, you put your property (often the family home) up as the security. Instead of a bank taking a mortgage over your property, this one and its applicable interest rate (currently 4.5%), is an arrangement with Centrelink.
The maximum total loan advance you can reach is calculated by rounding down the real estate securities value (confirmed by an independent valuer) to the nearest $10,000. Centrelink then divide it by 10,000 and multiply that by the ‘age component amount’.
This ‘age component amount’ starts at $1,710 for someone 55 or younger and increases every year, increasing the maximum total loan.
- e.g. 55-year-old with a $708,000 family home would have their maximum total loan advance calculated as $700,000 / 10,000 x $1,710 = $119,700 limit
The idea here is that the older someone is the less time the government would expect interest accruing for and so these limits are designed to reduce the likelihood the government would need to sell the home and get the loan back.
To be clear, one day this loan gets paid back. Whether this is when you sell the property or pass away.
When your total loan amount is reached, your fortnightly loan payments will cease however, in some cases, they can be re-established (e.g. if you wish to change the value of the guaranteed amount that you had initially specified).
To be eligible you must meet all of the following. You:
- or your partner are Age Pension age
- get or are eligible to get a qualifying pension
- own, or your partner owns, real estate in Australia that you can use as security for the loan
- have adequate and appropriate insurance covering the real estate offered as security
- aren’t bankrupt or subject to a personal insolvency agreement.
- You’ll also need to agree to the terms and conditions of the PLS to get a loan.
You can make repayments on the loan in part or full at any point in time.
While this may be a good option for those looking to cover ongoing living expenses and increase their quality of life, it will not meet the needs of borrowers who require an upfront lump sum to cover larger expenses, such as unexpected medical costs or home maintenance and renovations.
Hope that helps Nathan!