Opinion
Our two daughters are aged 27 and 29 and are a long way off from buying a property in the Sydney area where they rent. It has made me think if we take out a reverse mortgage using our fully paid house as collateral ($2 million) we could then gift them $100,000 each as a deposit on a property somewhere. My super is worth $500,000 and with a part Centrelink pension, I could help them with their repayments somewhat. I am 75 and my wife is 66.
This is an early inheritance strategy, and it can work to tackle the generational imbalances caused by high home prices.
My primary concern is that your wife, at 66 years of age, may still have 30 years ahead of her, perhaps more, so $500,000 of super, even with some age pension, won’t see her out. And so it is possible that she may need to access equity in your home to fund the later stages of her life, especially if either of you required care.
While your proposed gifts wouldn’t preclude her from making this move, because the interest on the reverse mortgage compounds, there may be less equity available to her when she needs it.
Twenty years from now, a $200,000 reverse mortgage will have a balance of $641,000 (6 per cent interest). You and your wife’s equity position will depend on the growth rate of your property value.
Typically, the growth in the value of the property would be enough to ensure your net equity ($1.8 million here) is at least maintained, but that is not guaranteed.
The Centrelink treatment is also important to consider. Centrelink ignores the value of your home for means testing. It therefore also ignores any reverse mortgages against the home.
But when you gift $200,000 to your daughters, $190,000 of this will be considered a deprived asset for five years. If your age pension is impacted by the Asset Test, this will mean your pension payment is reduced.
I need to take some time out of the workforce due to stress, at least one year, maybe a little more. I’m trying to figure out how to fund this. I could sell an investment property, but I’m concerned about the CGT. I have a share portfolio where I could switch off dividend reinvestment, but that income alone wouldn’t be enough. I could also sell the shares.
Check whether you have any income protection insurance (sometimes called Salary Continuance) within your super, as you may have a valid claim if you are unable to work due to stress.
Assuming no good news here, perhaps you could get a line of credit against the investment property and draw that down during your break. You would then pay that off when you return to work, or if that isn’t possible, clear it via selling the property or some shares.
This would enable you to delay any selling so that you only take this step if it is completely necessary. Property in particular has a lot of transaction costs in the buying and selling, so you want to consider any moves cautiously. You should endeavour to arrange the loan before you take your break, as you would find it difficult to obtain a loan if you are not working.
If you do need to sell something – either property or shares – doing so in a financial year when your income is low would minimise the capital gains tax liability. This may mesh well with your plans.
Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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Paul Benson is a Certified Financial Planner, and host of the Financial Autonomy podcast.
