An important change to the Pension Loan Scheme is now in effect, one that helps older Australians who are asset rich, but income poor.



The Pension Loan Scheme has been a Commonwealth program for 30 years, offering low-interest reverse mortgages to assist older Australians in retirement. The problem is that it used to be available only to retirees who are ineligible for the age pension.

“It is difficult to conceive of a policy which can significantly boost retirement incomes for Australians at low or zero cost to the budget, but this is what the pension loans scheme achieves” — Richard Denniss, chief economist at The Australia Institute.

The Australia Institute has championed this important reform for many years. In fact, we first suggested the idea back in 2014 in our report: Boosting Retirement Incomes the Easy Way.

Since then, we publicly congratulated then-Treasurer Scott Morrison for including it in the 17–18 Budget, and we are glad the Government has taken on board our suggestions and this important change came into effect in the 19–20 financial year.

“This expansion has the potential to improve the lives of many retirees by boosting their retirement income at almost no cost to the budget. It is a real win-win situation” — Matt Grudnoff, senior economist, The Australia Institute.


What is the Pension Loans Scheme?

If you’ve never heard of the Pension Loan Scheme, don’t worry, you’re not alone. While the Government has expanded it, they have not taken much time to advertise it.

The Pension Loan Scheme is a reverse mortgage offered by the Government. It allows retirees who own their own home to draw on the equity in their house to fund their retirement. It is designed to solve the problem that many retirees have where they are asset rich but income poor without having to leave their home and the local community.

A regular mortgage is where you take out a loan and then pay it off in fortnightly or monthly repayments. The Pension Loan Scheme is where you take out regular fortnightly payments from the equity in your home and then pay off the debt when you sell the house.

To be eligible for the Pension Loan Scheme you need to be of retirement age and own your own home. The Pension Loan Scheme allows retirees to increase the amount they get from the age pension by up to one and a half times the maximum rate. These additional payments are taken in the form of a reverse mortgage that is managed by the Government.

The expansion of this scheme means that it will be opened up to all those of pension age including those on a full pension, part pension or those who are ineligible for a pension because their income or value of their assets is too high.

Reverse mortgages have not been popular in Australia. This has been in part because banks have been reluctant to provide them with only four commercial providers. They also charge much higher interest rates than those taking out regular mortgages.

Like all borrowing, the Government will charge an interest rate on all borrowings from the Pension Loan Scheme. At the moment it is set at 5.25%. While this is above the interest rate you can get on most regular mortgages, it is still about a full per cent below what retirees can get on commercial reverse mortgages.

The Australia Institute has been pushing for this change since we released our first report on the policy idea back in 2014. In 2015 many of the Senate crossbench at the time signed up to the change and the Parliamentary Budget Office went so far as to cost the expansion of the scheme. The PBO found that retirees could unlock more than $2.8 billion to boost their retirements, all for a cost to the budget of just $23 million.


Why is this change so important?

Australia has some of the highest rates of poverty in retirement in the developed world.

In fact, Australia has the second-highest poverty rates in the OECD. Only South Korea has more retirees in poverty.

The expansion of the Pension Loan Scheme is not going to solve Australia’s problems with poverty in retirement. It is limited in large part because you need to own your own home. But it does have the potential to improve the living standards of many retirees.

The Morrison Government should be congratulated for seeing through the introduction of this reform and the Australia Institute encourages them to do more for poorer retirees, including taking up our idea of substantially increasing the rate of the age pension paid for by cutting back expensive superannuation tax concessions that mainly benefit wealthier retirees.


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