Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 76

Home equity release, the fourth pillar of retirement funding

There has been a lot of focus recently on retirement funding, across topics such as growing age pension payments, longevity, retirement age and costs of living. It is surprising not to hear more on the role that home equity could play in funding the retirement of senior Australians who own their homes.

Intergenerational wealth transfer

The family home is not just a place to live but also a store of wealth. The wealth could be released by simply selling the home, but this creates the problem of where to live. Downsizing is an option that might work for some people. Alternatively there are products which facilitate the separation of the ‘place to live’ and ‘store of wealth’ attributes. The most well-known home equity release product today is a debt product, known in Australia as a reverse mortgage. There are also equity products which involve selling a fixed share of the future sale proceeds of the home.

Our retirement income system is generally viewed as comprising three pillars: the age pension, compulsory superannuation and voluntary savings (including non-compulsory superannuation). Home equity represents a substantial additional pool of savings, and could be viewed as a fourth pillar of retirement funding.

Australian residential property assets have been estimated recently at $5 trillion, around triple the market capitalisation of the ASX. Housing wealth dominates retiree household wealth due to more than 85% of Australians aged 75 and over owning their homes. Substantial levels of housing wealth are bequeathed with annual intergenerational transfer of housing wealth projected at $20 billion in 2014, rising to $35 billion in 2025.

Borrowing to buy a home is effectively buying a large asset ‘brick by brick’ with the principal component of each mortgage repayment. Ideally, a home could be sold in the same way, to provide financial support in retirement. Home equity release products effectively facilitate this.

Retirees might release home equity for reasons such as unplanned medical expenses, home modification, a new car, in-home care services or simply to supplement income to fund a more comfortable retirement. Imagine the difference for some retirees if they could access their home equity to provide them with, say, $10,000 - $20,000 each year for the rest of their lives, rather than living on just the age pension then bequeathing their home when they die.

Tapping into home equity to fund retirement also provides a societal benefit, improving intergenerational equity, or fairness between older and younger generations of society.

The current system, where each generation funds the age pension costs of the previous generation, is breaking down because people are living longer in retirement, ratios of workers to retirees are falling, and the age pension is not well targeted.

The family home is fully exempt from the age pension assets test. This provides a disincentive to unlock housing wealth to fund retirement and worsens intergenerational equity. Many of those bequeathing wealth will have received a part or full age pension, and the benefits that come with that, during retirement. Intergenerational wealth transfer is generally not taxed (other than a tax on some components of inherited superannuation).

Changing public policy on housing wealth

Better targeting of the age pension would increase the likelihood that government can afford to pay pensions at adequate levels to those retirees with no other sources of financial support. Targeting should consider a retiree’s full wealth and means of financial support, including housing wealth. Removing all or part of the family home exemption from the age pension assets test would be politically sensitive - many voters view the age pension as an entitlement, not a safety net, and today around 80% of retirees access either a full or part age pension.

Critical in any change to the assets test is good public policy to avoid unintended adverse consequences. Senior Australians should not be forced to sell their homes. There would be a risk of this if the exemption were simply removed and the private sector did not step in to provide universally available home equity release solutions. Public policy must consider the availability and design of products on offer.

The home equity release market today is small. There are challenges on the demand side for a range of reasons including emotive issues relating to the family home, a lack of product providers and no promotion of the concept by government. The main challenges on the supply side are around capacity.

The November 2013 report by the Grattan Institute entitled “Balancing Budgets: tough choices we need” put forward one approach to utilising home equity to help fund retirement. It involves including the family home in the assets test but mitigating the impact on low-income retirees with high-value houses by allowing them to claim the pension and then repay the value of the pension drawn when the house is eventually sold. It is estimated that this would improve the budget by $7 billion per annum, without undesirable social consequences.

The issue was also touched on earlier this year when the Commission of Audit proposed capping the extent to which the family home is exempt from the age pension assets test, but interest in the topic waned when government rejected this proposal.

Retirement funding should be considered more holistically than it is today. There will be challenges in utilising home equity release and creating a framework that is fair. But as our population ages and our fiscal challenges continue, we must create mechanisms such as home equity release which become a meaningful fourth pillar of retirement funding.

 

Christine Brownfield is an actuary with 20 years’ experience in life insurance and wealth management, and is currently working at Homesafe Solutions, a provider of home equity release products.

 

RELATED ARTICLES

Ralston on accessing equity in the family home

Survey responses on pension eligibility for wealthy homeowners

Home equity access and four challenges of retirement

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Latest Updates

Taxation

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

7 key charts on the state of the Australian property market

The Australian property market stirs fierce debate - often bullish optimism versus crash predictions. But beyond the noise, seven charts reveal what's really driving prices and the outlook for residential real estate.

A simple alternative to the $3 million super tax

Division 296 aims to introduce improved fairness into the superannuation system, yet is overly complex. This scours the world for better ideas and suggests a simpler alternative which can achieve the same goals.

CBA and the index conundrum for super funds

After the hyperbolic rise in CBA shares, super funds are floating the idea of carving out the weightings of ASX bank securities and indexing them within their portfolios. This looks at why that might be a big error.

Strategy

10 policies to drive Australian productivity higher

Here's a comprehensive list of proposed reforms to fix Australia's stagnating economy, including introducing a flat income tax rate, reducing migration, and making childcare tax-deductible.

Interviews

Where to find big winners in Asia

As more money looks for a home outside the US, Asia may soon get some love. Fidelity's Anthony Srom outlines the best places in Asia to invest, including in Chinese consumer names, Indian financials, and Thailand.

Investment strategies

We have trouble understanding the time value of money

We overvalue the present and underestimate the future - it’s a cognitive glitch called hyperbolic discounting. It affects savings, spending, and loans, and it's more common - and costly - than we think. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.