Assessment of asset value of Home Equity Conversion loans and Reverse Mortgages 108-04100020

A HEC Loan Agreement is a mechanism that allows a homeowner to convert all, or part of the equity locked up in their home into cash or a stream of income. A key feature of a home equity conversion agreement is that the loan (including interest) is not repayable until the homeowner moves out of their home or dies.

Do not assume that because the lending institution has named a loan a HEC Loan it will meet the policy definition for HEC loans. If a customer is thinking of applying for one of these loans, refer them to a Financial Information Service (FIS) officer.

Customers with a HEC arrangement are still homeowners for assessment purposes.

HEC agreements should not be confused with sale leaseback agreements, which are a commercial arrangement where a person sells their principal home but continues to live in the home for a contracted period, often for life.

Reverse mortgage products are HEC Loans, available to residential property owners aged over 60 living in their own home. The loan is secured against the customer's home or investment property. The customer can typically borrow up to approximately 45% of the value of the property. Borrowers are not required to make any repayments until the home is vacated permanently or in some cases until it is sold. All interest and fees are rolled into the loan balance, to be paid at the end of the contract. The amount borrowed is paid to the customer as a lump sum or as a series of monthly payments.

Until recently, Reverse Mortgage products on the market required repayment of the mortgage if the customer permanently vacated the principal home the mortgage was secured against. Some new products allow customers to access the equity in their own home but move without the loan becoming repayable immediately.

There is also a type of Reverse mortgage, which allows the customer to borrow a percentage of the current value of their home. The customer is advanced a lower amount, and the remainder is retained by the bank in lieu of fees and interest. The bank then receives the full percentage borrowed from the eventual sale price, for example, the customer is approved to borrow 20% of the value of their home. The customer may be advanced 11% of the current value of their home, the bank retains the remaining 9% in lieu of interest and charges. When the home is sold, the bank will receive 20% of the eventual sale price.

Note: it is important for the customer to supply the documentation relating to their loan to correctly determine the exact type of loan agreement the customer has taken out.

All funds received / drawn down are not assessed as income, however, normal deeming provisions apply.

Any funds which have not been received / drawn down are not an asset.

Only accounts with a positive balance are assessed as an asset. A mortgage has a negative balance and is therefore not an assessable asset.

If the customer has not drawn down and received the funds, the customer must advise within 14 days once the funds have been received.

The first $40,000 received / drawn down is exempt from the assets test for a maximum of 90 days.

If after 90 days a person has not spent the funds, the amount becomes an assessable asset.

The spent funds are assessed accordingly. For example, used to purchase an asset such as a car, the car is counted as an asset under the assets test.

Where a customer receives / draws down a series of payments (e.g. monthly), the first $40,000 of each draw down is exempt from the assets test for a maximum of 90 days.

See Resources page for an example.

If a customer accesses the equity in their principal home through a Reverse Mortgage, then leaves the principal home without being required to repay the mortgage, Home Equity Conversion rules can be applied.

Several organisations are also marketing Reverse Mortgage products that allow customers to access the equity in their unencumbered investment property, rather than their own home. The Department of Social Services (DSS) has advised a Reverse Mortgage on an investment property cannot be assessed under the Home Equity Conversion rules under section 8(1) of the Social Security Act 1991. The References page contains more information. However, such a mortgage would reduce the asset value of the investment property against which it was secured. The lump sum paid to the customer may be an assessable asset, depending on the purpose it was put to. The lump sum paid to the customer is not assessed as income as it is a return of capital.