Paying off Reverse Mortgage

[albanga]

I was hoping for some advice on a situation.

My grandfather has a reverse mortgage on his home at around 8% for 140k.
My mum is about to sell her home and rent and we anticipate after paying off her mortgage and other debt she will have around 280k in the bank.

Both mum and my grandfather receive the pension, my mums is a carers pension for my grandfather.

In my head the smartest thing to do is when mum settles is pay out my grandfathers reverse mortgage. The reason being this is her inheritance, she is an only child and the house has been left to her in the will.
Failure to do this will likely mean by the time my grandfather passes away the bank will almost own the entire house. So by then the money she has from the house will be spent and now she has no inheritance!

So I see it as instead of mum putting the money in the bank at 2.5%, she pays of her inheritance currently losing 8%.

My concern however is how centrelink will view this and perhaps the ATO? Mum is not asking for my pop to return the money, she will only receive the benefit when the asset passes back to her upon his death.

We are arranging a meeting with centrelink to discuss our plans but wanted to raise it here first.

 

[Terry_w]

Seek legal and financial advice.

First thing talk to Centrelink, they are pretty helpful. 2nd don't assume your mum will inherit - she probably will but many things can happen such as:
1. will invalid
2. someone else pops up to make a family provision claim
3. mum dies first.
4. grand dad becomes bankrupt

Probably a loan to grand dad may be worth considering. This could be at 0%.

 

[Paul@PFI]

Our firm offers aged care services and financial advice for such cases (not me). Even if you do it correctly you may complete the forms incorrectly and be adversely affected. Your decision to discuss with Centrelink before acting is a good idea.

Mums payment to benefit her dad by reducing his debt may well result in a deeming issue as she gifts her assets to her Father. Good news is that deeming rates have just been dropped. Deeming will affect Mum's pension for a while - perhaps even after her Dad has died if he dies within five years. The $ may also count as an asset but she may already be under the asset limits where a pension is affected. The greater concern may be a reduced pension for five years. A 0% loan a good idea BUT deeming may still occur.

The ATO will have no issues. Of course if Mum's home has any CGT issues a return may need to be lodged. If its only ever been her home then no tax issues.

 

[albanga]

Thanks Terry and Paul
I will start with a conversation with Centrelink with mum and based on the feedback will update you both via this thread.

I may require assistance so could be in contact.

Thank You

 

[Scott No Mates]

As highlighted above, gifting the money to pay off your grandfather's loan may not be appropriate (even if it is the right thing to do). By your mother giving away more than a nominal amount (I recall about $10k) your mother may be ineligible for her pension to continue. It may be better, as suggested to loan the money to your grandfather (if he is capable of making such decisions etc).

 

[albanga]

Hey Paul and Terry,
I just wanted to give an update on this as I met with a Centrelink financial adviser yesterday and must say I was surprised by the answers.

As you know there are 2 ways in which a pension is assessed (asset and income). As my mum does not work at all and given when she sells her home she will only have around 280k (after paying all debts) then she sits in the asset category.

I then asked 2 questions. First was about paying out my grandpas reverse mortgage which she said could be done 2 ways. Purchase a percentage of the property based on the reverse mortgage cost(120k) and property value (roughly 30%). I believe she would not need to pay stamp duty as she is a pensioner but legal fees/other considerations?
If she did this then her assets would remain the same, she either has cash assets or asset in the house so her pension would not be effected.

The second way was to loan grandpa the money, mum would not go on the title but the part i found interesting is she said this would still count as an asset. Now because it would be an asset, same principal and no effect on her pension.

The next question I asked is what about if mum was to loan me the money. The arrangement being I place it in my offset against my PPOR mortgage, reducing 4.5% interest and in-turn I pay her a much healthier 3.5% return on her funds. Again I was informed the loaned money would still be classed as an asset and what's more mum would still only declare the income on the standard Centrelink rates (1.75% < 48K and 3.25% > 48K). This means she would still fall into the category of asset tested.

Now our conversation was purely based around the pension, I understand there are tax considerations and declaring any loaned money to the ATO along with many legal considerations.

 

[Terry_w]

A loan is always an asset of the lender.

If you paid your mum interest are you saying that centrelink won't deem this income at the rate you pay her? I would have thought they would have.

 

[albanga]

A loan is always an asset of the lender.

If you paid your mum interest are you saying that centrelink won't deem this income at the rate you pay her? I would have thought they would have.

As would have I but I quote "This is the rate we assess income from interest on, if you can get higher returns then great for you".

 

[albanga]

What I also found interesting was basically the asset test is really an honesty system. You need to declare to them the value of your assets. A house asset is different because they would ask for the rates notice (Which let's be honest is going to be less than market value).
Cash as well they will ask for bank statements but anything else is really you just advising what you believe the cost of your assets to be worth.

But they actually gave us a tip that 10k can be gifted each financial year and that is removed from the asset test. They then advised you can gift your child 20k within a week spanning the financial year and it will remove 20k from your asset base.

 

[Scott No Mates]

So centrelink works on the deeming rate vs ato on actual

 

[albanga]

So centrelink works on the deeming rate vs ato on actual

That was my understanding of the conversation and I did definitely confirm it about 3 times just to be sure.

 

[greedy2000]

At this stage no matter what your mother does with the funds, pays off the reverse mortgage, puts it in your offset, loans it or gifts it. Its still an asset in the eyes of Centrelink.

If your mother was to "gift" the full amount to you or to your grandfather, it would only be deemed a financial asset for a 5 year period. At the end of this period the asset would disappear off the books, so to speak.

If the goal is to increase her centrelink long term, gifting may be the way to go.

However you have to ask, whats in the best interest of your mother?

- She pays off the reverse mortgage, great but she won't have access to these funds, and will have to wait until he dies to get the funds back. Then what if the house actually doesn't go to her, or your grandfather needs to go to a nursing home where a large bond is payable? or what if he takes out another reverse mortgage?

- She gives the money to you and parks it in your offset. great you save a bit of interest, she generates a bit more interest a win win right? Maybe. But what if you get divorced? this is your asset now and your partner might want a share. Maybe with this extra bit in an offset you get carried away and borrow more funds for a development and it all goes pear-shaped?


The best solution may be the easiest which is for your mum to invest her funds appropriately cash, managed funds etc and not muck around with it. As a non home owner with $280K in the bank she will get quite close to full age pension anyway.

 

[albanga]

Hey Greedy,
Thanks for the detailed and insightful post.
We did also speak about the 5 year gift so was aware of that.

My intention has never been to maxamise mums pension. The topic was originally started because my concern is this:
Grandpa has a reverse mortgage at around 7% on 140k (20k he has unspent in a term deposit, which still means he is losing money on it).

Mum will get around 2% in a bank in a standard transaction account, and yes I understand she can get more but higher returns are generally going to carry higher risk (She is 65 so the goal is mitigating as much risk as possible).

Grandma has passed away, mum is the only child and grandpa is 85 years old. My fear is if nothing is done, then mum will slowly spend her money down at the same time the bank takes more of grandpas home. When he finally passes away mum could have no money left and the bank owns most of the house. Where does that leave mum?

I definitely agree with the risks of lending to me and would not do this but just raised it as an interesting option that I am sure others do leverage (single kids especially).

 

[Terry_w]

In all of these situations you have to think what can go wrong:

death
divorce
bankruptcy
incapacity
disputes
cashflow
timing issues
etc

Think for all parties - what if the lender dies, but what if the borrower dies?

 

[Scott No Mates]

Mum will get around 2% in a bank in a standard transaction account, and yes I understand she can get more but higher returns are generally going to carry higher risk (She is 65 so the goal is mitigating as much risk as possible).

Your mum has the wrong bank account. She should be able to get the pensioner deeming rate account.

 

[Greg Reid]

It is a conversation worth having.
First you assumption that by the time your grandfather dies there will be no equity in the property is most likely inaccurate. What is the property worth now, what area is it in and expected long term suburb growth? Compounding interest on a loan is easy to calculate, you could use the ASIC reverse mortgage calculator to get an estimate of end value over time periods. Alternatively contact me or another broker who deals with reverse mortgages to get this.

If the interest rate is 8%, look at the benefits of changing lenders, better rates are 6.45% to 6.49% pa.

An option some of my clients and their children have used is the children pay interest on the loan, $140k at 7% say = $9,800 pa. Your mum could gift that, keep under the pension gifting rules and keep a cap on the loan.

The deeming method for Centrelink can be an avenue to help boost pensioners incomes, as the financial asset is deemed to earn specific returns irrespective of what is actually earned. I have had senior clients with funds loaned to children who may have them in offset or used to pay off credit cards and return 5 or 6 or more% to the parent yet using deeming rules, they are assessed by Centrelink as income of the rates shown above. It can be a win/win, however protection by way of loan documentation is critical. It could also be used as a loan to your grandfather with the issue being the interest rate 'charged' on the basis of him not being able to make any interest payments.

Your mum selling her PPOR and renting and having a $280k financial asset, it is under the asset test threshold, so should not effect her pension but most likely the deemed income would under the income test (estimate $95 a fortnight reduction in pension). I would ask why does she want to sell and rent?

If the $280k was invested at 2%, $215 per fortnight interest earned. At 4.5% offset (do not be making money from your mother) rate she gets $484 per fortnight.

Why not consider both options, pay off the RM of $140k using a loan instrument and if needed, take first mortgage over the property or caveat to protect your mum, and loan you the balance or a component and you pay her 4.5% or whatever so her actual income is not too badly affected by the pension reduction (she may be eligible for rent supplement). Do the numbers to see what works best overall.

The main question is why she wants to sell? It is converting a capital growth asset exempt from all sorts of tests, to renting and investing the proceeds in what is essentially a non growth financial asset and subject to pension tests.

There is no easy answer for seniors whose main asset is their PPOR and no income. Living on a pension is tough, especially for singles.
Good luck with it.

 

[Paul@PFI]

A loan is always an asset of the lender.

If you paid your mum interest are you saying that centrelink won't deem this income at the rate you pay her? I would have thought they would have.

Hmmm. The actual rate prevails. Perhaps its a nil rate in which case the deeming rate prevails. Many of these loans are set at the deeming rate for simplicity. Gregs comments are all good but the likelihood of refinance would be almost zero.

 

[Greg Reid]

My understanding of Centrelink use of deeming rates is to take out the administrative burden of having to check (and perhaps ease for pensioners) actual rates from a wide variety of income sources, hence for most financial assets, they use deeming rates.

Per the DHS site:
The deeming rules assume your financial assets are earning a certain amount of income, regardless of the income they actually earn. Deeming encourages you to earn more income from your investments and reduces the extent that your payments may vary.

In some cases they can work in the favour of pensioners, using methods I suggested above, or where investments are in the defensive stocks returning 5% dividend yield, yet in other cases where no care is taken, pensioners can be worse off with $200k sitting in a main stream lender cheque account earning no interest yet still deemed to be earning for pension income test purposes. The banks offer seniors bank accounts and just pay deeming rates even when RBA rates where significantly higher.

As to refinancing a RM, it is certainly possible in many cases depending on valuation and age of occupant. I have done a number recently from higher rates of lenders who sold their loan book after GFC to more competitive loans. You simply do the numbers to make sure it is a benefit to the client.