The question, ‘my parents are cash-strapped, so why don’t they sell their house?’ is a familiar topic of discussion among us, Gen X’ers, aged between 43 and 59 in 2024.
With many Gen X’ers having done okay and some having done extremely well, those with respect for the start their parents gave them often feel guilty about not having the time to help out their parents more. And while it is important to acknowledge we make time for what’s important to us (one of the most valuable realisations to dwell on), the conversation often then turns to what baby boomer parents can do for themselves. To the Gen X’ers I say, your parents are adults and fully capable of making decisions about their finances, just as they did before you were born! Nevertheless, the adult kids often wonder why the large home their parents are living in isn’t sold with some of the proceeds used to finance more ‘joyful’ pastimes.
There are several factors at play. For many parents, holding onto the family home and leaving it to their children is an act of love and provision. There are also practical considerations. Established relationships in the local community and proximity to familiar places and essential connections are crucial. Meanwhile, the frictional costs of selling and stamp duty on a new, smaller property are also deterrents. Even leaving the garden behind can be too heartbreaking for some to consider. Moreover, if a suitable downsizing option is unavailable locally, moving away to rebuild friendships and community is often the only, and usually undesirable and unacceptable alternative.
What if my parents want to access more cash?
Selling the family home isn’t the only way to release some cash. Some options release equity and permit continuity of lifestyle in the family home.
Knowing the proceeds can be invested to produce an attractive monthly income may help with the decision-making process and conversations.
Discussing the options
Retirement is often the time to enjoy the fruits of one’s labor, but for many Australians, the reality is a stark contrast. Despite having significant wealth tied up in their homes, a considerable number of retirees find themselves with insufficient superannuation and savings to fund their desired lifestyle. This paradox raises a crucial question: How can retirees access the equity in their homes to secure a more comfortable and financially stable retirement?
The untapped potential of home equity
The family home has long been considered the Australian cornerstone of wealth. And for many, it is. The home provides shelter, security, emotional attachment, and as we explored earlier, a legacy to pass on to the next generation. However, there are limitations associated with this line of reasoning leading retirees to overlook the financial potential locked within their own home.
Missing out on travel, or a nice wine, or that new local restaurant is unnecessary, when millions of dollars are available in the walls of the family home. Sure, as we age, we want for less, but we don’t have to go without. Gradually and sensibly drawing down and spending superannuation savings or other assets, such as the home, is a difficult but possibly rewarding bridge to cross. Additionally, the funds accessed can be invested and with the income used for lifestyle pursuits. In the latter case the capital need not diminish and long-term security remains uncompromised.
Barriers to accessing home equity
Several factors inhibit retirees from tapping into their home equity. Emotional attachments and the desire to leave a debt-free home to heirs are significant psychological barriers. Meanwhile, downsizing or accessing home equity is burdened by red tape and transactional costs, including stamp duty and legal fees. And the lack of suitable housing options in familiar neighborhoods can make the prospect of moving unappealing.
Obviously, the government could do something about this, and it would also help with anemic consumption (which current measures must rely upon immigration to boost). Relaxing and finetuning income and asset rules for the age pension and changing means testing and assessable asset rules for released home equity could alleviate some of these barriers.
The rise of private credit as a potentially lucrative investment and source of income
While retirees tackle the question of how to utilise their home equity, another financial trend is gaining momentum those same retirees need to be aware of: the burgeoning private credit market. Quality, growing businesses are demanding credit that banks are being regulated away from providing, fueling opportunities for investors seeking higher yields.
Private debt funds, such as the funds accessible through www.montinvest.com are offering returns ranging from eight per cent to 12 per cent, attracting self-funded retirees and high-net-worth individuals eager to enhance their income streams.
Since the global financial crisis (GFC), changes in bank capital adequacy regulations means the supply of capital to quality businesses is declining versus the demand for it. That represents a compelling need for borrowers keen to secure capital, but also an opportunity for investors to reap an attractive premium from private corporate lending.
The Aura Private Credit Income Fund targets return of nine to 12 per cent per annum from a broadly diversified portfolio of secured loans to businesses in Australia. The fund is also working towards bridging the funding gap left by major banks by focusing on profitable businesses now forcibly ignored by traditional bank lenders. Importantly for investors, the fund only finances businesses providing adequate security and/or generating comfortable levels of cashflow to service their debt.
Marrying home equity with private credit investment
It’s not easy to decide to sell the family home or even some of it. Releasing equity from the family home means you will ultimately share the proceeds of any future market sale with someone else. But it also means earning an income, and possibly an attractive one, today. Remember, when equity is tied up in the family home, no income is being produced.
The convergence of the two major financial themes thus presents a unique opportunity for retirees. By accessing the equity in their homes, retirees can invest in private credit funds, thereby generating higher income to support their retirement lifestyle. The strategy not only unlocks dormant wealth but also capitalizes on the robust returns offered by the private credit market.
And you can continue to live in the family home surrounded by all that is comfortable and familiar.
As we predicted some years ago, more investors, advisers and commentators now see private credit as an essential asset class within portfolios, while economists and commentators see private credit as complementary to bank lending with an essential part to play in the economy.
Mitigating risks and ensuring alignment
Not all private credit funds are the same and investing in private credit is not without risks, such as liquidity and lower regulatory oversight compared to traditional banking. However, funds like the Aura Private Credit Income Fund are structured to mitigate these risks by applying stringent investment criteria and aligning interests between lenders and investors.
Retirement prosperity
The intersection of home equity access and private credit investment offers a potential transformation or retirement financial planning. Retirees can unlock the wealth in their homes to invest in high-yield opportunities, thereby enhancing their financial security and quality of life.
Changing the narrative around the family home from an untouchable asset to a strategic financial tool however is essential. With supportive policy changes and increased education on the benefits and methods of accessing home equity, retirees can embrace this new and powerful financial combination. At the same time, where traditional income streams may fall short, leveraging home equity to participate in the private credit market could be the key to a more prosperous and fulfilling retirement. Retirees can enjoy a more flexible lifestyle and silence the whining of their Gen X kids!
DISCLAIMER
The Aura Private Credit Income Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887)(Aura Group).
This information is for wholesale or sophisticated investors only and is provided by Montgomery Investment Management Pty Ltd (ABN 73 139 161 701, AFSL No. 354 564)(Montgomery) as the authorised distributor of the Fund.
An investment in the Fund must be through a valid online application form accompanying the Information Memorandum.
The information provided is general in nature and does not take into account your investment objectives, financial situation or particular needs. Before making an investment decision you should read the Information Memorandum and (if appropriate) seek professional advice from a licensed financial advisor to determine whether the investment is suitable for you.
Montgomery and Aura Credit Holdings Pty Ltd (ACN 656 261 200, CAR 1297296) (Aura Credit Holdings), who is the Investment Manager of the Fund do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.
Aura Group has entered into a Distribution Partner Agreement (Distribution Agreement) with Montgomery to distribute the Fund to its client base. Montgomery may receive a share of the fees you pay as well as potential equity in Aura Credit Holdings.