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THE PRODUCTIVITY COMMISSION HOME EQUJTY RELEASE PROPOSAL

The PC proposal
The PC suggests that drawing on housing equity could improve the capacity of seniors to contribute to the costs of their own care (espec.ially those 'With limited superannuation). The PC has proposed 2 methods for achieving this:

1. 	a government provided equity release scheme (called the Aged Care Home Credit
Scheme); or

2. 	exten'sion of the Pension Loans Scheme  (PLS).

Government  provided equity release scheme

The proposed Aged Care Home Credit Scheme would have the following features:

seniors could assess aline of credit up to a specified limit (e.g. 40 or 50 per cent of the equity they have in their primary residence);

the government would take a charge over the senior's principal place of residence to
secure the loan;

·available to seniors in all localities;

the line of credit should only be drawn upon for the purposes of funding aged care services, including residential aged care accommodation charges;

relatively low upfront charges;

interest would be charged at a rate equivalent to CPI, calculated daily and compounded on the o.utstanding loan balance;

once the line of credit is completely drawn down (including .interest charges) no further equity·could be released and no further interest applied (effectively a no negative equity guarantee);

repayment would only be required from the person's estate after their death. However, if a partner, carer or dependent child still reside in the home, repayment would not be required until such a person vacates or ceases to be a dependent; and

the Australian Seniors Gateway Agency would arrange the valuation of the principal place of residence and specify the maximum level of equity available for the line of credit

Fiscal implications
In order to provide the line of credit to seniors the Government would need to raise the funding through additional debt issuance, which would place further stress on the debt limit

This scheme would gross up the balance sheet through an increase in both interest bearing assets and interest bearing liabilities.

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The financial risks associated \'iith the nature of the asset, including the provision of a no negative equity guarantee, would be passed on to the Government's balance sheet

In addition, the interest rate differential between the Government borrowing rate and the rate charged on the line of credit provided to seniors would increase the Government's PDI and negatively impact on underlying cash balance.

Should this proposal be treated as a concessionalloan there would be an upfront reduction to the fiscal balance and increase in net debt (to ihe extent of the concession). As repayments are made, this impact is unwound, improving the fiscal balance.

Advan ges and disadvantages to the Aged Care Home Credit Scheme
The below table summarises the advantages and disadvantages of the type of government back equity release product recommended by the Commission.

Stakeholder	Advantages	Disadvantages	
Seniors	Increases seniors' ability to pay for aged care co..contributions costs,	May be used as a subsidy for seniors to live in larger houses for
longer.	
	Reduced instances of downsizing
allow seniors to stay in their primary
residence and remain connected to
their  sting community.	Has equity implications in that the
greatest benefits accrue to those
seniors who have the highest house values.	
	Promotes senio:rs capacity to exercise
choice in aged care services.	Greater choice may have
implications on aged care provider resources,	
	Provides access to a potentially safer
way foi- senims to access the equity in their homes than current commercial products.	Over time, may reduce incentives
for seniors to plan for retirement income from other sources.	
			
	Overcomes information asymmetries
applicable to reverse mortgages (e.g. uncertainty about longevity, over- depleting equity and house price and interest rate movements).		
Government	AJ; those with a greater capacity to
pay contribute more to their own care, government funding of care could be increased for those with less capacity to pay.	Creates a method (and incentive) to convert means tested assets into
non-means tested assets, and in
turn, increases exposure to aged pension outlays inrelation to those seniors who use the scheme in that way.	

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	Increased co-contributions by seniors would reduce reliance on
government expenditure on aged
care services.	Depending on the rate of take-up, Government would incur relatively large costs in the establishment and
ad.ministration of the scheme, and may face risks of losses shruld the amount of the debt be allowed to exceed the value of the house on sale.	
	Government has the benefit of immediate economies of scale not available to commercial equity release providers. This should mean Government could provide the product at a relatively lower price.		
			
Future
generations	Promotes intergeneration equity with
seniors who have a greater capacity
to pay for their care relieving stress on the tax base, especially inlight of Australia's ageing population.	The liquidation of housing equity now reduces intergeneiational wealth transfer.	
Economy	Supplying a product which private providers have rela±ively less
commercial incentive to provide (in the case of small regular payment loans).	May distort decisions to downsize, delaying-the turnover of housing
stocl<:.	
	Overcomes the market failures which are considered to prevent the equity release market supplying this type of
product universally.		
Cul"rent equity release product providers	Increased awareness by seniors of a
government provided product may
increase their awareness of commercial products or of equity release products more generally.	Commercial providers likely to
criticise government unless the product is restricted to persons where a commercial product is not available (for example, those in regional areas). However, this would risk creating a dual pricing
system, according to the borrower's
location, or other attributes.	
		May crowd out the development of
equity release products used for
aged care purposes (especially accommodation bond loans) by commercial providers.
-	·	

Extending  the Pensioner Loans Scheme (PLS)
The PLS allows seniors to use their equity in real estate (not necessarily their primary residence) as security for a loan for any purpose, Eligibility is restricted to persons aged 65 and over who are not eligible to receive the aged pension (due to either the income test or the asset test,. but not both), or who receive a part pension. Therefore, seniors who are on the full rate aged pension are ineligible for the scheme.

The PLS provides fortnightly non-taxable payments up to the full amount of the aged pension (i.e. is only available as an income stream and not as a lump sum). This means a part-rate pensioner would receive the difference between what they are entitled to receive and the maximum pension rate and a senior who is ineligt"ble for an aged pension would receive an aged pension up to the maximwn rate.

The total amount of equity that a senior can draw down using the PLS is ultimately dependent upon the location of the secured property and its value.

Seniors can elect to protect a certam percentage of their equity from being part of the security for the loan  This percentage can then be available for other purposes such as paying for residential age care. However, the more equity they protect, the less can be borrowed.

Interest on the loan is charged fortnightly and is compounded until repayment is made.Full repayment-is not required unless the senior voluntarily sells their property, o.r from the proceeds of their estate after their death. The PLS also includes a no negative equity guarantee which provides that borrowers will not have to repay more than the value of their home.

The Commission suggest that the PLS oould be expanded to allow small regular swns to be drawn do)Vll above those currently available to PLS borrowers to cover aged care costs. The proposal is not clear, regarcling the quantum of these regular drawdowns.however, it implies amo.J.mts -would be greater than those currently available (i.e. greater than topping up the bono.wers pension to the full maximum rate).

An expansion of the PLS to all eligible seniors would pose similar costs and risks to the
Government as described above for a Government provided equity release scheme.

Advantages and disadvantages to extending the PLS
This proposal would have advantages and disadvantages consistent with many of those under the Aged Care Home Credit Scheme proposal detailed above. Inaddition to these, it would also have the following advantages:

start up costs are eliminated and administration costs reduced since it would utilise an existing scheme;

the period required to implement changes to the current PLS would be shorter compared to the establishment of an entirely new scheme; and

effects on the existing commercial equity release market would be limited since the market is already familiar with the existing PLS scheme and there is therefore un1ikely to be criticism from these operators:

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