Ask Noel: Reverse mortgage or annuity?

I have $238,000 redraw available on a mortgage loan for an investment property that is currently positively geared. Can I use the redraw facility on this loan to withdraw these funds to purchase another investment property?

Provided the money redrawn was used to buy an income producing asset the interest would be tax deductible.

I lost my job a few months ago and will soon be on the age pension. I am single and own my own home. I have $146,000 in super that I will need to take as an account-based pension, which will be 5 per cent of the balance every year. The sum would be $7300 per year, making it $280 per fortnight? How will I be assessed? I have tried a few different calculators, but still can’t understand.

Money withdrawn from an account-based pension is not assessable to an age pensioner. The value of the superannuation fund which is the source of the account-based pension will be deemed. For a figure of $146,000 the deemed income would be $154 a fortnight. You will find simple deeming and aged pension calculators on my website, noelwhittaker.com.au.

I am 73 years old and own a mortgage-free house worth, in today’s market, just over $800,000. I have $70,000 in savings but no superannuation. I am on the full pension but this is not enough to cover the maintenance, rates, etc for my 40-year-old house, so each year I use $10,000 of my savings to help cover these items. In seven years, supposing I survive that long, I will need to take out either a reverse mortgage or an annuity to cover these annual costs. My daughter paid the deposit on my house and I want to leave my house to her and to my son.

Downsizing is simply not an option as far as I am concerned, as I would lose a minimum of $70,000 in the transaction (seven years’ house maintenance) and perhaps purchase a property at a cost of $700,000, which would not leave me with much extra for maintenance for the new property and my children would inherit a smaller sum of money. This does not sit well with me and as the property market is lifting, I believe I would be foolish to sell now. I would be grateful if you could explain the difference between a reverse mortgage and an annuity and which of these I should take out in these circumstances?

I like your thinking. If you buy an annuity you are exchanging a lump sum for an income stream, which may be for life, or for a contracted period such as five years or 10 years. A reverse mortgage is a loan against your home with no repayments of principal or interest. Therefore, the loan would increase faster and faster as time goes by due to the effect of compounding.

Based on the information you have provided you would appear to be a perfect candidate for the Pension Loans Scheme, the expansion of which was announced in last month’s budget. The interest rate is 5.25 per cent and the payments to you would be made fortnightly just like your pension is now. This slow drawing down of the loan means it will not increase as quickly as if you borrowed a lump sum. These loans will not be available to full pensioners until after July 1 next year. As you point out there is no desperate hurry. Just hope the scheme will still be around in seven years.

Noel Whittaker is the author of Making Money Made Simple and numerous other books.