The fractional investment platform, DomaCom, has a new model for seniors’ equity release that takes a different approach to the more traditional reverse mortgage model and Government Pension Loan Scheme.
Instead of raising a debt where the interest is capitalised against the property like a reverse mortgage, the fractional model is a shared equity structure, meaning that seniors can sell part of their property to one or more investors while remaining in the property for as long as they want.
“It is an ASIC-registered financial product that operates in similar fashion to a syndicate,” says DomaCom Marketing Manager, Warren Gibson. “The only difference is that the title stays with the owner, and DomaCom protects the investors’ interest with a mortgage instrument over the property. When the senior decides to sell the property, the investors will receive a share of the net sale proceeds in proportion to the amount they invested.”
DomaCom has launched a campaign to gather expressions of interest from seniors to who would prefer to access equity in their home instead of raiding their superannuation or selling other assets such as equities in today’s depressed market.
Demand from seniors may also fuel interest in funding equity release by some of Australia’s largest financial institutions as well as bring the senior financial advice demand to the fore for financial planners and government.
Seniors can register an expression of interest, which is not a commitment.
How does senior equity release work?
Although there is no interest capitalising against the future value of the property, the owner pays rent on the share they sold to the investor. This is fixed for life. The base fee is 4.4% which includes a small platform fee of 1.4% to cover fund administration and annual valuation costs, property management, longevity risk and insurances, leaving 3% being paid to investors.
Seniors who take out an equity release, therefore, become part owners and part tenants and pay rent only on the percentage they do not own, just as you would if you rented a whole house. The difference is that you own the house, hold the title and have permanent right of abode.
Fees, including rent to the investors, are taken five years in advance to eliminate any concerns the senior may have about the payments. After five years another fraction is sold to cover the fees and rent for the next 5 years. In the meantime, the advance fees are earning interest.
A simple example would be a couple aged over 60 who own a home valued at $1 million who would like $100,000. DomaCom would sell 12.8% which is $128,000, give them $100,000 and retain $28,000 to cover fees for the next five years.
Payment can be in the form of a lump sum or a flexible monthly payment. For example, $1,000 a month for the next 100 months might be preferable. Payments can be raised or lowered depending on need, but advice is necessary to ensure any Centrelink entitlements are not adversely affected.
For seniors who want to keep their house in the family, other members can purchase part of the property using savings or even money from their self-managed super fund. They get an investment and a return, and the home remains in the family.
Unlike other equity release models there are no postcode restrictions in the fractional model, but if there is a mortgage on the property that will have to be settled from the proceeds of the equity release before any money can be distributed.
Regarding costs such as maintenance, building insurance and repairs, all co-owners share this in proportion to their equity.
The flexibility of the fractional equity release model includes the ability to move out and rent the home to other people and retain the rent. This is particularly handy for seniors considering retirement living as they can road test retirement village living and can still go back to their home if they wish. This can also work for those wishing to do the “grey nomad” trip or similar circumstances.
As with all financial products there are risks that must be considered, so this innovative approach requires the property owner to get advice before they can access the product to ensure they are across these risks as they may affect them as well as the features and benefits. Only licensed financial advisers who are accredited in this product can provide that advice.
