Vendor financing, assets, income and the pension

NRG, you are making a few mistaken assumptions.

When one sells with vendor finance, the vendor who remains the owner until he receives the total amount agreed upon does the financing.
He is selling you a house in instalments in stead as in one lump sum as it is usually done.

If the owner has a mortgage, the bank may be informed but does not necessarily change the mortgage agreement. If he does not, then it is a private agreement.

Some banks do get involved in vendor finance agreements when the purchase and vendor finance is done simultaneously, aka wrap. (Not to be confused with rap), yet the title remains in the name of the mortgagee.

As for the million-dollar question, what happens to your pensioner who wants to sell his house to you, using vendor finance?

First, you must tell me if this is the pensioners IP or PPOR.

If it is the pensioners IP and such asset has already been assessed and recorded, and the value is up to date, this is what happens:

The value of the asset will slowly decrease in Centrelink’s records as you pay it off. As for the income side of things, an assessment must be made to establish if interest is being charged and therefore income is generated. In addition, the money you repay will in itself become and asset and is subject to the deeming interest rate, regardless of the interest it generates in reality.

The above situation may in itself be a trigger for trouble because most pensioners’ assets are badly undervalued; (IP in Sydney for 150,000 not uncommon) so any change will trigger a new valuation by the AVO and therefore lower the pension received automatically, unrelated to the transaction but grandfather may not see it that way.

Second scenario, the house is the person’s own home, he will sell to you and go to live with his daughter.

In this case, the house occupied by the pensioner is an exempted asset. As soon as the pensioner moves out of the house, he/she becomes a homeowner that lives away from home. The hose will become an asset in his entirety, since the title is still on his name.

If the wrap is done legally and it is a clear case of vendor finance, Centrelink will consider it a sale but the unpaid portion of the home remains the pensioner’s asset, and the money coming in is also subject to the deeming interest rate. In the above scenario, the whole value initially and gradually less as you repay will become a NEW asset and will most likely reduce the pension substantially or cancel it altogether, if the value is over 414k for single person or 581k for married. This higher rate applies to “non home owner” and the process of vendor finance must be explained and documented or lower rates (in my view incorrect) for homeowner will apply.
Remember that if the house is say worth 300k and you repay in 5 years 100k, that does not mean the asset will necessarily reduce from 300 to 200, since the money paid goes into a bank account and becomes an income producing asset, unless grandpa loses it all in the TAB.

As you can see the impact on the pension if the pensioner sells his house is huge yet if it is an IP the change may not be great or none at all.

In case you feel tempted to bend the rules and tell Centrelink that grandpa lives at home with you when he really moved out, be careful.
Such schemes are relatively easy to uncover and remember that any amount overpaid must be repaid, amounts over $5000 will not only attract fines but also persecution and criminal records will apply. If intent to defraud the Commonwealth can be proven, criminal convictions apply even with lower amounts in the order of $1000.

Well, lawyers usually know jack about Centrelink’s rules or worst, are convinced that they do. I would ask a FISO in Centrelink first.

This person inherited a property but has not moved into it, so it is not an exempted asset and should have reduced his pension already providing he declared it.

He can move in it, he can rent it, he can sell it and buy another one, or sell it and keep or spend the money.

Selling it by conventional means or by vendor finance will not make any difference. If he keeps it he has an asset minus the $30,000.
If he sells it for a lump sum, he has the value $X-$30,000 = $Y Is this enough to buy something for him? Would he buy something or rather stay in Dep. Housing place?
If he sells it by vendor finance, he still has an asset that is worth X-$30,000 and will receive from you the repayment in instalments. These installments will reduce the amount of asset from the house but will become a separate asset in the form of money in the bank.

If this money will be regarded by the vendor as income, and go in the form of everyday expenses, the person will have a source of income from the repayments for as long as it takes you to repay the loan. It will mean higher rent, and a reduced pension that will very slowly and progressively go up again as you pay and he spends the money.

It is hard to say which one will be a win-win situation without knowing the protagonists.

To move in, or to sell by conventional means would be my advice for the pensioner since it will free him from the debt, and make the asset exempted from the test. Yet he may think he has won the lotto by living in subsidised accommodation and does not want the responsibility of a property and its related expenses. If that is the case, he will perhaps see the money from the sale as a problem and tend to go for an “asset minimisation exercise” clearly not in his favour in the end.

A vendor finance will give him a better life style (if he goes the way of spending it), for a limited but rather long time. He will still have a reduced pension and an increased government rent.
Yet the above will feel like he is squandering the parent’s home.

Of course he has other resources like selling it and purchasing a complying annuity that would be also excempted, but this products are heavily biased in the bank’s favour and usualy are not very popular with pensioners.

Furthermore, the pensioner may see you as trying to profit from the situation, even when it is not true, the friends at the pub will probably convince him of that.

Hard call. May be someone else sees it different?

My God prosper you always.[biggrin]
Marc