by Warren Gibson, Head of Marketing
It was the famous 19th century French poet and novelist Victor Hugo who said, “nothing is stronger than an idea whose time has come”. At DomaCom, that’s how we like to think about home equity release.
The concept of using the home to release capital is not new; there have been variations around this concept for years. But for whatever reason none has really caught the public’s imagination. We suspect that’s about to change.
For nearly three decades, compulsory superannuation has been a key pillar of people’s retirement income strategies, with the other being the Age pension.
When superannuation became law on 1 July 1992, it was assumed that, over time, more and more people would gradually be able to use it and not have to be rely on the Age pension. But that hasn’t come to pass. A majority of retirees still don’t have enough superannuation, or other assets for that matter, that they can call on, so they are left with the Age pension as a safety net to cover basic living costs such as food, utilities, rates, and clothing.
But the pension falls short in areas such as private health insurance and all but basic travel requirements. And forget about a new car or overseas holiday.
So, in 2020, we find many people can’t rely fully on superannuation to fund their retirement, with the slowing (and perhaps ending) of Superannuation Guarantee increases only likely to exacerbate this situation. At the same time the Federal Government has been forced to embark on the biggest peacetime pump-priming spree in this country’s history, and that will inevitably put pressure on future governments to try and curtail spending, including taking a tough line on increasing the Age pension.
What it means is that the family home, which was on the periphery of the retirement income debate, is about to play a far larger role. Traditionally seen as a valuable asset to give children a financial leg-up, the family house could be set to play a different role – filling the gap between the safety net and how we would prefer to live. Enter home equity release, that small, legislated and mostly regulated collection of products that can provide the necessary funding for a decent standard of living in retirement.
Also, enter a rather complex set of rules and issues that embrace superannuation, tax, Centrelink and estate planning. And that’s before family dynamics, which can be fragile at the best of times, enter the frame.
This is where understanding and planning comes in and while it is up to seniors to state their preferences, they will need a financial adviser who can understand the rules and their financial impact so they can devise the best solution for their clients..
From DomaCom’s perspective, we believe how the family home fits into a retirement income strategy will play a bigger role in an adviser’s practice, whether it be billing a client for the time taken to prepare a plan, or by securing referral business from other family members, particularly younger ones who may become tomorrow’s clients. Every generation has its needs and financial advisers are ideally positioned to help at every stage.
Advisers have not engaged widely with equity release products, let alone seniors’ wealth protection, but that is slowly changing with new products such as DomaCom’s Senior Equity Release, a financial product that advisers can recommend in the normal course of their work.
Traditionally, advisers have not engaged with the family home as an asset that can help seniors re-balance their personal balance sheet because the home could not be “unitised”; it was an all or nothing proposition. Not anymore.
Advisers are also in the box seat (or should we say in a seat outside the box) when it comes to Millennials and Gen Z, those considered most at risk of not affording a home.
Several ideas have emerged in recent times to address this:
- RentVest where you buy what you can afford and rent it out, then rent a place where you want to live;
- Rent to Buy where you contract to purchase a home at a specific point in time, pay your deposit and pay rent in the meantime; and
- Rent to Own where you pay rent to the investors who purchase the property while receiving an equity gift of 1% a year up to 5 years with the ability to purchase further equity from the investors over time as and when you can afford to.
Each model has different characteristics. The Rent-to-Own model is the only one structured as a financial product and therefore able to be advised by licensed financial planners. With Rent to Own, the other investors can be family members, so introducing intergenerational planning.
So, here are a few intergenerational ideas:
- Millenials and Gen Z can get on the property ladder through Rent-to-Own with or without family and friends investing;
- Seniors can use equity release to be co-investors in Rent-to-Own for younger family members;
- Seniors can use equity release to top-up their super (the ATO recently issued a confirmation that the DomaCom Fund can be used under the Downsizer legislation);
- The ATO confirmed in 2019 that SMSFs can invest in property via the DomaCom Fund where a relative may apply to be the tenant subject to signing a Sole Purpose Test Declaration – an ideal solution for parents with Millennials and Gen Z children;
- SMSFs can invest to provide senior family members with an equity release; and
- Multiple investments can be made to provide diversification – some rent-to-own and equity release.
The key to planning in the 21st century is to think outside the box, which brings our thinking around to income and capital growth requirements in portfolios.
Again, traditional bond and equity portfolios can be enhanced dramatically by including other asset classes within the property sector.
Here we can include affordable and disability housing that offer higher than usual rental returns due to government funding, rural farmland where rental returns beat most city residential rents and offer long-term growth, and renewable energy and syndicated developments that variously offer sustainable rents, development capital uplifts and depreciation.
Advisers can also set up pooled mortgage syndicates for their income-oriented clients to lend to their growth-oriented clients, using the property as the security on a 50% LVR basis.
Advisers can control both sides of the transaction, also fulfilling any liquidity needs using DomaCom’s secondary market to bring new investors on board when existing clients need to sell down.
In a nutshell, it means the fractional investment model gives investors equal opportunity to invest where only the big end of town usually invests and offers greater diversification as a result.