18.104.22.168 Security for HEAS
- retirement villages
- property valuation
- effect of mortgage on property
- what happens to property offered as security
- who pays for the costs involved
- people rearranging their assets
- transfer of HEAS security and/or debt to another person
- changing the nominated amount
- reduction in value of real assets
- excluded assets
- other people with interests in the real assets
- Certificate of Title
A person must establish that they have sufficient real assets (1.1.R.15) to secure and repay a loan under the HEAS. A person has the choice of excluding a property from the real asset/s offered as security for a HEAS debt. They can also nominate an amount (1.1.N.78) to be excluded from the asset value for calculation of the loan. Both of these decisions result in a reduction in the value of real assets, and may have the effect of reducing the maximum loan available to the person.
Only real assets owned in Australia can be used as security for a loan under the HEAS. Any real asset, including the principal home, can be used.
Note: Commercial property and vacant land also qualify as a securable real asset or property.
Act reference: SSAct section 11A(1) Principal home, section 1133AA(1)-'real assets'
In order to qualify for the HEAS, the loan needs to be secured against a real asset. 'Real assets' are defined as 'real property (including the principal home) of the person or couple in Australia'.
While there is nothing in the legislation that specifically precludes HEAS loans from being secured against retirement village units, only residents that hold freehold title are able to meet this requirement for a real asset.
In most cases, retirement village residents would not qualify as they do not own the property and their name is not on the title. Instead, they pay various fees including entry fees and ongoing maintenance fees to live in the village.
A person must have their name on the title to enable the Commonwealth to assess if adequate security exists, and to ensure recovery of the debt.
Furthermore, even where residents hold freehold title, their agreements with retirement villages likely limit the sale of the property or distribution of the sale proceeds. Exit fees, refurbishment costs or other charges set out in contracts or arrangements with a retirement village may make it difficult to identify, or may reduce, the equity in the property that can be used to secure the HEAS loan. The nature of the pre-existing interests of the retirement village on the property may mean that the property is not an adequate security.
Any property, including a person's principal home which is offered as security for the HEAS, must be valued.
When determining the value of real property the Secretary may take into consideration any charge or encumbrance over the property.
Policy reference: SS Guide 2.2.9 Retirement verification
Effect of mortgage on property
The presence of a mortgage or reverse mortgage on the property offered as security for a HEAS debt does not necessarily disqualify a person from the HEAS. However, the mortgage should be considered, when valuing the real assets and when calculating the maximum loan available to the person or couple.
What happens to property offered as security?
The debt arising from HEAS is secured by a statutory charge over the property the recipient has offered. In practical terms the Commonwealth lodges a caveat over the property/ies.
Explanation: A caveat is a legal notice to a court or public officer that prevents the sale of the property until those identified on the caveat are given a hearing.
Exception: In Queensland a 'notice of charge' is used.
Services Australia arranges the lodgement of a charge over the real asset on the title deeds of the property. The charge may also be registered against the person's home property.
Act reference: SSAct section 1138 Existence of debt results in charge over real assets
Who pays for the costs involved?
Any costs involved in registering the charge are payable by the person offering the securable asset and may be paid at the time of registration or added to the debt. If these costs are added to the loan debt they will attract interest in the same way as the loan payments. The recipient is also responsible for the subsequent cost of removal of the charge. If this occurs after the recipient's death, their estate incurs the charge.
People rearranging their assets
A recipient who rearranges their assets may make it necessary for a caveat or charge from one property to be removed and placed onto another. This rearrangement of assets does not alter a recipient's participation in the HEAS as long as the substitute property's value is considered to provide adequate security for the debt. A request to change the security must be in writing and signed by the recipient and their partner if they are a member of a couple. Any costs associated with rearranging the assets are paid by the recipient.
An underlying principle of the HEAS rules is that in a couple situation, regardless of whether one or both partners are applying for or receiving a HEAS loan, both partners are aware of the terms of the loan including any changes. For this reason, SSAct section 1136(2) and section 1137(2) require that both partners sign the application for a HEAS loan and nomination of or change to the guaranteed amount, respectively. The same principle should apply to any changes in assets offered as security for a HEAS loan.
Transfer of HEAS security and/or debt to another person
A HEAS loan is paid to an individual person and the ensuing debt is the liability of that person.
Court ordered decision
Where a court ordered decision transfers HEAS security and repayment of debts for one person to another one person, or transfers repayment of debts for 2 people to only one person, Services Australia is bound to comply with the court order.
Note: As there is a transfer of ownership of the security, a new caveat would need to be lodged against the secured property.
Agreement between 2 parties
The SSAct does not contemplate the transfer of a HEAS security and/or debt by agreement. Accordingly, such transfer is not permitted. DSS legal advice is that in the absence of express legal authority, it is unlikely the department would be able to appropriately assess whether a person to which a debt is proposed to be transferred to, has sufficient assets against which to secure the debt. It is also unlikely there would be a legal basis for asserting a charge over their assets. These factors mean there would be a risk that the capacity of the Commonwealth to recover the transferred debt would be questionable.
Changing the nominated amount
If a recipient has specified a nominated amount, they can change this amount at any time. A request to change the nominated amount must be in writing and signed by the recipient and their partner (if they are a member of a couple).
Reduction in value of real assets
For the purposes of the Age assets test the amount owed by a recipient under the HEAS is allowed as a deduction from the value of the recipient's assessable assets used as security for the loan. As the amount owing increases with each payment made under HEAS, the value of the recipient's assessable assets (i.e. the net value) normally decreases. This however, depends on whether the gross value of the asset is appreciating. When the assets are decreasing in net value, any pension payable under the assets test may increase.
NO reduction in the overall value of assets will occur if the pensioner's principal home is the ONLY security for the debt.
Explanation: The principal home is an exempt or non-assessable asset.
If the HEAS loan is secured by assessable real assets AND the pensioner's principal home, the full value of the loan is deducted from the value of the assessable asset.
Explanation: The apportionment of encumbrances rules do not apply to HEAS loans.
Act reference: SSAct section 1121(4) If there is a charge or encumbrance over assets …
Any real assets excluded from assessment under the HEAS need to be taken into account when calculating a person's entitlement to pension under the normal assets test provisions.
Other people with interests in the real assets
Sometimes another person, other than the recipient or their partner, has a life interest (1.1.I.185) in the real asset that has been used to secure the HEAS loan. In this case:
- the current value of the life interest needs to be obtained, and
- the value of the life interest reduces the equity that the recipient's estate has in the real asset (see explanation).
Explanation: This has the effect of reducing the security of the loan and possibly reducing the maximum loan the person is able to receive.
Certificate of Title
A Certificate of Title (long lease) creates a 'real property right' for a person and satisfies the concept of 'ownership' of real assets for the purposes of SSAct section 1133.
A Certificate of Title does not reduce that security protecting the Commonwealth's interests.
Example: When a person sells their home in the ACT (ACT leases), while technically they only have a 'lease' on the land component, the person, not the ACT Government, receives the financial benefit of the land value on sale. Where the ACT Government did reclaim land subject to a Certificate of Title, the person/s affected would receive financial compensation (as in normal instances the person cannot take their physical home with them). The Commonwealth's interest should still be protected.
The presence of a Certificate of Title does not preclude the Commonwealth from seeking payment of an outstanding HEAS debt, nor does it prevent a person/s from selling their property.
Act reference: SSAct section 1133 Qualification for participation in PLS
Members of a couple applying under the HEAS are both required to sign the loan application, even when the offered security is solely owned only by one member. Without both signatures, the application is not a valid request to participate in the scheme.
Act reference: SSAct section 1136(2) Need for a request to participate, section 1135A(1) Effect of participation in PLS-maximum loan available