Hi all and happy new year
First a quick intro, then a question. I’ve been thinking about investing in property for a long time now, and have finally started doing some serious research. +CF has always made more sense to me than -CF, so I was really impressed with Steves book (the 130 in 3.5 years one). I’ll shortly be putting my unit on the market as it’s costing me a fortune and I know I could be using my income in a way much more beneficial to myself. The defence Force subsidises my rent, so I’m well placed to rent and put all my money into investments. I’m really excited, and have already booked plane tickets to the area I want to invest in so I can get started.
Anyway, the question. My mother visited over christmas, and she got a bit excited about IPs as well. She owns her own home, and has about $20k put away. The problem is that she’s on an age pension, and is worried about how owning IPs and getting income from rents would affect her pension. She is scared the govt. will take away her income before she’s earning enough from IPs to support herself.
Does anyone know how to work a situation like this so that she can build up a portfolio large enough to support herself, and not end up losing all her pension before hand for owning property and earning income from rent, even though most of it goes back into the property?
I suggested she could put the properties in my name until she had enough to go off the pension altogether, but we’re not sure about the legalities of that.
Any info/suggestions would be greatly appreciated.
Cheers [biggrin]
Kez
is there a limit of assets she can own outside of the family home before the pension is affected?
I know in SA there is threshold you can reach before what you are saying is an issue.
Byronent
Adelaide SAHi Byronent
There is a certain amount she can own in assets before it affects her pension. Not sure what it is, but I’ve heard of stories where the only asset of a retired couple is their own home, and because it’s worth over a certain amount, they receive no pension, even though they have no income. They have to sell their home (which may have been in the family for generations), buy cheaper, and live of any gains until they are pretty much destitute before they can get a pension.
I think the biggest problem mum is worried about is that she has to declare income as she earns it. She would have to notify SS of any rents she had coming in, and they would dock her pension as soon as they heard about it, without considering that most of it was going in repayments etc. She’s afraid that if she owned 2 properties (for example) each paying $150 per week rent, she would lose her entire pension, and maybe be left with $40 odd a week to live off after loan repayment and running costs.
Is it just me, or does the govt. really like to keep poor people poor?[confused2]
Kez
Hi Kerri,
There is a fairly low limit imposed on additional income (not sure exactly how much) before they start to decrease your pension. This is not the problem because the amount of pension you loose is less than the amount of additional income you earn ie you have more $$$ p/w anyway. The problem as I understand it is that there is a limit on the value of your assets (in NSW I think it is about 300k and your PPOR is not included in this regardless of the value) so unless that 300k worth of property is safely +ve CF then you will likely end up with less $$$ p/w.
I am no expert and this is only my understanding of it. I am a bit frightened of Centrelink as I once rang them 4 times about something important (to us) and recieved 4 different answers. Perhaps there are private accountants with comprehensive knowledge of Centrelink policy.
Best of luck to you and your mum – I’m sure there is a way to get free of that pension.
Regards,
SonjaI would speak to an accountant who knows about trusts if I were you.
Rgds.
Lucifer_auLucifer, Centrelink know all about trusts now. If you control one they will treat the trust assets as your own. They treat ‘control’ very broadly. So they generally do not work in this way anymore, even if you are a beneficiary, it will affetc your pension.
Kez, Just give centrelink a call and they will be able to tell you. My grandfather is going thru this atm, and I know the thresholds are low, but not sure on the exact amounts.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
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Originally posted by Kerri-67:
Kez
Hi Kez
The asset test is:
Single pensioner: Full Pension Up to $153,000. For part pension up to $309,750
Couples $217,500 – $478,000
You mums home (place of residence) is not counted as an asset, even if it’s worth $1M.
Assuming you mum borrows for the IP, the loan is deducted from the value of the IP, and the net amount is assessed as an asset.
Tax deductible costs eg loan interest, rates etc, are allowed to be deducted from the gross rent, and the net amount is assessed as income.
I would generally advise pensioners against this strategy ie borrowing for IPs, as it tends to be fairly inflexible, eg if you run a bit short, or needs money for repairs, you can’t sell a part of a house, if int rates rise, or she has a vacancy, she has no real surplus income to cover itGarry
Maybe she would be better off investing in managed funds or a property trust?
Thanks,
LuckyoneHi,
just a couple of thoughts. Have you taken a look at the Centrelink web-site, it can be confusing but it’s certainly a start. If you do call and ask questions be sure to get the name of who you spoke to because you do tend to get a few different answers.
Do you think your mum would be interested in a reverse morgage, where she gets the amount her house is worth now from the bank, and it gets paid back from her estate?
I don’t know much about it, but that may give her some income.
Landt.My parents recently took out a reverse mortgage with CBA. All well and good for what they wanted but the terms and conditions say that you are not to use the funds to purhcase other property. I guess you could live off the reverse mortgage and invest the pension? But does the reverse mortgage then become classified by Centrelink as income?
More questions than answers here!
Kind Regards,
SonjaKerry, as stated before, the value of the owner occupied home is irrelevant for Centrelink purposes.
The asset test stated above is correct, yet in your mums case she will be affected not by the asset test since she has no assets beyond her own home and will not instantly pay off the mortgage, but by the income test. Only one of the two can be applied, according to the test that allows for the lower payment.Asset test for homeowner, single, for full pension is ~$150.000. Assets over these amounts reduce pension by $3 per f/n for every $1000 over the limit.
This is the net asset, so if you owe money on the IP this is taken off…BUT…it is not that simple, depending if the mortgage is stand alone or if she uses her home as equity, see example below.
Income test for single pensioner: full pension payable if income below ~$120. THIS IS NET INCOME BEFORE TAX.
Income over this amount reduces the rate of pension by 40 cents in the dollar.
Some considerations:
If your mum will borrow against her home in order to finance an I.P….
this action will make that part of her home will now be assessed as asset, or rather, part of her purchase will be considered an asset even if she owes 100% to the bank.For example: If she has her own home paid off, it is worth $300,000, and she purchases an IP for $240,000 using her home equity as security, Centrelink will apply this formula.
Mortgage $250,000 (for example to allow for repairs)
IP Value $240,000
Home Value $300,000250,000
_______________ x 240,000 = 111,111
300,000+240,000This means that the mortgage of 250,000 from the new IP will be considered only 111,111 so your new assessable asset is now 240,000 – 111,111 = 128,889 as opposed to zero.
The effect of the above can be reduced if a smaller separate loan is taken to contribute to the purchase, say $50,000 to make up for 20% and the rest goes on a stand alone loan on the IP.
I suggest that you get an accountant to do the sums for you / her, and that then (refraining from discussing Centrelink policy with the accountant who is bound to use hearsay galore) you then visit your local Centrelink and make an appointment with your FISO, financial information service officer for some further clarifications.
Please DO NOT call the call centre, the FISO are not on call and the people on the phones are not trained for this questions, not even close.
Book an appointment face to face with a FISO.I agree with the comment that real estate investment is perhaps not the most flexible of the methods to be used by a pensioner but considering the alternative on offer, reverse mortgage being one of the most repulsive and unethical ever invented, if you mum can have a sense of achievement by purchasing one ore two IP and adding some income to her pension without stretching the risk unnecessarily and considering you will be her natural ally, I say go for it.
May God prosper you always.[biggrin]
MarcThanks very much everyone[cap]
I’ll pass this all on to mum and see what she thinks.
Have a great day
Kez
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