The federal government is to review the interest rates charges on the Pension Loans Scheme, which allows retirees to supplement their retirement income by drawing down in equity in their homes.
The current interest rate for reverse mortgages under the government’s Pension Loans Scheme (PLS) is 5.25 per cent.
Given that the Reserve Bank of Australia has dropped the official cash rate three times this year (bringing the current rate to 0.75 per cent) and the government’s recently announced review of mortgage pricing, there have been increasing calls for government to drop the interest rates tied to the Pension Loans Scheme to reflect the record-low interest rate environment.
Calls for a review
For example, in Parliament last week, former Labor Party leader and current MP for Maribyrnong, Bill Shorten, said: “We have a thing in this country called the Pension Loans Scheme. It enables older people who own property to get a boost to their cash flows. In effect, the government takes a part mortgage and charges an interest fee, and the older person gets to unlock some of the equity in their home to meet their financial expenses.
“The government is essentially acting as a bank for older people with mortgages. It has a good-hearted public service goal at heart. But when the Reserve Bank cut the official cash rate to a record 0.75 per cent on 1 October, this led to bank loan rates at 3 per cent and, indeed, as low as 2.9 per cent, while the government’s Pension Loans Scheme is still charging older Australians at 5.25 per cent.”
He continued: “Even private sector versions of the Pension Loans Scheme, like the ME Bank, have dropped their rates of reverse mortgage to 5.15 per cent.
“There are good, important questions here:
- Why is the government-run scheme no cheaper than a bank?
- Why is it that the banks have a bigger heart than the Liberal-National government?
- Why won’t the government, who calls upon its mates in the banks to pass on the Reserve Bank’s interest rate cuts in full, do what it’s telling others to do?
- Will the Treasurer investigate himself as he’s asked the ACCC to investigate the banks?
- Why should the government be able to borrow money at about 1 per cent and massively profiteer from old-age pensioners by not cutting their own rate?”
Mr Shorten concluded: “The unkind might call this a pensioners tax, a retirees tax or, indeed, a Morrison death tax. I call upon the government to fix this shocking situation, stop being hypocrites, pass on the cuts and stop gouging older Australians and pensioners, who have done nothing to deserve this.”
Likewise, National Seniors Australia chief advocate Ian Henschke told ABC News last week: “The facts tell it all; it’s a means of making money. They are balancing the budget on the backs of pensioners and retirees”.
Government ‘continually monitors the appropriateness of the interest rate’
Treasurer Josh Frydenberg has confirmed that the government will review the rates of the Pension Loans Scheme; however, details of this review have not yet been released.
Mr Frydenberg commented: “The Pension Loans Scheme, which is currently used by around 1,100 Australians, was first introduced in 1985 for people who choose to boost their retirement income by unlocking equity in their home.
“A number of private sector providers offer similar reverse mortgages.
“The current interest rate of 5.25 per cent for the Pension Loans Scheme is lower than the rates charged by the private sector,” he added.
Mr Frydenberg noted that “typical” interest rates for commercial reverse mortgage products currently range from around 6.25 per cent to 6.5 per cent per annum, with the Reserve Bank indicating that the current average home equity loan interest rate is 6.35 per cent.
The Treasurer said that the interest rates for reverse mortgages are “above standard mortgage rates, reflecting their higher risk”.
He concluded: “The government continually monitors the appropriateness of the interest rate for the Pension Loans Scheme to ensure the rates are reflective of current market conditions.”
Members of the retirement funding and reverse mortgage market have welcomed the announcement, with the chief executive of funding provider Household Capital, Josh Funder, stating: “Australians deserve efficient, affordable access to their home equity to fund their retirement.
“For many retirees, the PLS is a start, albeit with limited flexibility. We welcome the Treasurer’s willingness to examine the current rate of 5.25 per cent p.a. and move towards a lower rate such as that offered by private sector providers.”
“We call on the government to support retirees with this review by passing on improved home equity interest rates, as a lower rate of compound interest can have a significant impact in preserving more home equity throughout the term of their loan,” Dr Funder added.
He also urged the Treasurer to ensure the review takes into consideration protections for PLS customers, suggesting that they be “thoroughly vetted for potential elder abuse”.
However, National Seniors Australia’s Mr Henschke called on government to expand the review to deeming rates as well, which he suggested was “also too high compared [with] market rates”.
Mr Henschke said: “It is gross hypocrisy, calling on the banks to pass on the full Reserve Bank rates cuts when they are not doing the same. If you’re attacking the banks, you’ve got to do something about your own house and get it in order.
“I think it’s pretty clear there’s a double standard here. The government is supposed to help pensioners, not make money out of them.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.