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

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

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.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

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.

Latest Updates

Superannuation

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. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

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.