The Pension Loan Scheme will be overhauled by the federal government to allow seniors to unlock the equity in their home under a new reverse mortgage model.
The revamped scheme was announced in the mid-year budget update and from January 1 will be called the Home Equity Access Scheme.
The government has slashed the scheme’s interest rate from 4.5 per cent to 3.95 per cent so that older Australians can have access to lower borrowing costs and longer loan payments.
Finance expert Effie Zahos spoke about the changes on Nine’s Today program.
"I have talked a lot about this over the pandemic - the government charges retirees such ridiculous interest to access their loan," she said.
"I can get a loan for 1.77 per cent, the cheapest. Retirees were paying something like 4.5 per cent.
"It jumped down to 3.95 per cent, still a bit expensive, but a lot better."
Ms Zahos said the main pros of the scheme were it allowed pensioners to live in their home for longer and funded their retirement lifestyle, while the main cons were that the interest compounds and it eats into the equity of the home.
"You are eating into the equity of your home," she said.
"I mean, there is a cap, but what could happen - say you want to go to an aged care facility - you have to pay the debt back along with compounding interest.
"That is the danger, taking this from the government versus the bank loan is this won't impact your pension, whereas the bank ones will. It is important you get expert advice."
Pension Boost founder Paul Rogan told Australian Financial Review the rebranding was a good idea to attract more users of the scheme, but it needed to be backed by a good advertising campaign.
“Renaming is good because people who are self-funded have been put off because they think they’ve got to be on the pension,” he said.
“The rebranding is good, but there’s not much point just putting a rebranded product on the shelf. They’ve still got to get on with putting it out there.”
Mr Rogan said the new 3.95 per cent rate was very competitive.
“It was already the lowest in the market, and there’s no material fees that government charges apart from some upfront legal costs, so it’s a very competitive proposition,” he told AFR.
“The thing that we still believe needs to happen is that the rate-setting mechanism itself needs to be more transparent for consumers.”