Josh Frydenberg says current interest rate of 5.25% for pension loan scheme is lower than rates charged by private sector

This article is more than 10 months old

This article is more than 10 months old

The Morrison government will review the 5.25% rate it charges for reverse mortgages after criticism from seniors groups that it has been gouging pensioners at a time of record low interest rates.

Josh Frydenberg unveiled the review on Wednesday night, but he pointed out the current interest rate of 5.25% for the pension loan scheme was lower than the rates currently charged by the private sector.

The reverse mortgage scheme was created to give older Australians the option of unlocking equity in their homes to boost their cash income. Pensioners can choose the amount of loan they get fortnightly and the amount can be up to one-and-a-half times the maximum rate of the qualifying pension.

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The money has to be repaid to the government, and the interest rate is 5.25%, which seniors groups say is too high given the cash rate is now at emergency levels.

National Seniors chief advocate Ian Henschke recently declared the rate of interest for the scheme was a “rip off” and he argued the Morrison government could not criticise banks for failing to pass through the Reserve Bank’s interest cuts when it was charging high rates itself.

Frydenberg, while confirming the government would review the current setting, begged to differ. “The pension loan scheme, which is currently used by around 1,100 Australians, was first introduced in 1985 for people who choose to boost their retirement income by unlocking equity in their home.

“A number of private-sector providers offer similar reverse mortgages. The current interest rate of 5.25% for the pension loan scheme is lower than the rates charged by the private sector.

“Typical interest rates for commercial reverse mortgage products currently range from around 6.25% to 6.5% per annum. The Reserve Bank indicates the current average home equity loan interest rate is 6.35%.

“The interest rates for reverse mortgages are above standard mortgage rates reflecting their higher risk.”

He said the government continually monitored the appropriateness of the interest rate for the pension loan scheme to ensure the rates were reflective of current market conditions.

In response to concerted lobbying from seniors groups, the government has already moved on deeming rates.

The deeming rate is the amount the government deems your income to be from your financial assets. It calculates the amount of income received from a financial asset regardless of the actual return. This calculation is used for the pension income assessment and can affect how much someone receives through their pension.

The deeming issue and the pension loans scheme has become politically controversial because successive cuts in interest rates have impacted retirees’ earnings. Older Australians argue they are being shortchanged by the system.

In July, the Morrison government promised to adjust the lower deeming rate from 1.75% to 1% for financial investments up to $51,800 for single pensioners and $86,200 for pensioner couples, and cut the upper deeming rate from 3.25 to 3% for balances over these amounts.