As Australian property values have risen steadily, many retirees have become asset-rich but cash-poor. Most of their wealth is tied up in their home, but with regular employment income, they have enough cash flow to cover everyday expenses like groceries, medical bills, and home upkeep.
A reverse mortgage offers a possible financial solution. It allows retired homeowners to borrow against their home’s equity without selling it.
In this article, we cover reverse mortgages, how they work, and how you can use one to maintain your lifestyle in retirement.
Want expert and personal advice on a reverse mortgage for your borrowing scenario? Check out our list of the best mortgage brokers below.
What is a Reverse Mortgage?
Definition
A reverse mortgage is a home loan that allows you to convert a portion of your home equity into cash. Unlike a traditional home loan, you won’t need to make regular repayments. Plus, you can keep living in your home while you have the loan. Interest on the reverse mortgage loan keeps compounding over time, and when you sell the house, you pay back the interest along with the loan balance you borrowed.
Eligibility Requirements: Who Is Most Likely to Get A Reverse Mortgage?
Reverse mortgages are typically designed for retirees. Eligibility varies among lenders, but some general requirements include:
- Minimum Age: For most lenders, borrowers must be at least 60.
- Primary Residence: The property must be the borrower’sborrower’s primary residence.
- Ownership and Equity: The borrower must own the home with significant equity.
You can borrow more with a reverse mortgage as you get older. Each year, the percentage of your home’s value you can access increases. For example, if you’re 60, you might be able to borrow 15–20% of your home’s value, but this percentage could increase by about 1% every year after 60. Older borrowers, particularly those over 75, may access a larger share, often 30–40%.
Types of Eligible Properties
Most lenders accept free-standing houses, apartments, and townhouses. However, they may restrict specific property types, such as high-rise apartments or homes in urban development zones. Rural properties, properties with zoning restrictions, or those with complex ownership arrangements may also be ineligible.
Are Reverse Mortgages Popular in Australia?
Historically, reverse mortgages have suffered from reputational issues in Australia. Banks including Westpac, Bankwest, Macquarie and Commonwealth withdrew their reverse mortgage products following the royal commission into banking in 2017, and only some lenders offer reverse mortgage products. The Australian Government has its own version of a reverse mortgage called the Home Equity Access Scheme (HEAS).
However, reverse mortgages are growing in popularity among older Australians as they look for a practical way to solve cash flow issues and combat the higher cost of living.
Why Take Out a Reverse Mortgage?
A reverse mortgage’s main benefit is turning part of your home into cash without selling it. If you own a home in a sought-after suburb of a capital city like Sydney, Melbourne or Brisbane, your net worth has increased alongside the property prices.
However, this jump in net worth might have yet to translate to better cash flow because most of the money is tied up in your home. A reverse mortgage solves this problem and helps you:
- Boost Retirement Income: A reverse mortgage can be a practical way to access liquid cash if you lack income-producing assets such as dividend shares or an investment property.
- Cover Medical Expenses: Struggling to pay rising health insurance premiums or medical expenses? You can use the money from your reverse mortgage to pay your health bills.
- Home Renovations: If your home is due for a makeover, a reverse mortgage may help you fund home renovations.
- Combat the Rising Cost of Living: With inflation soaring over the past few years, a reverse mortgage might be a way to manage daily expenses and maintain your lifestyle in retirement.
- Financial Support for Family: A reverse mortgage could be an option if you want money to help family members who are studying, buying a first home, or have other financial needs.
How Does a Reverse Mortgage Work in Australia?
The amount you can borrow depends on age, home value, and the lender’s loan policy. The older you are, the higher the percentage of the loan proceeds your home’s equity you can access. Australian lenders offer a maximum loan-to-value ratio (LVR) that increases with the borrower’sborrower’s age.
You have several options for accessing funds from a reverse mortgage, such as:
- Lump Sum Payment: Get funds paid simultaneously in a single payout.
- Line of Credit: You can access funds when you need them. Interest is applied only to the amount you withdraw.
- Regular Income Stream: Get a consistent monthly or quarterly payment.
Some lenders will let you access funds using these advanced payment methods.
Interest, Fees, and Compounding
Reverse mortgages are more complex than standard home loans, and lenders generally apply higher fees and interest rates. Your loan balance grows as interest accrues, so you’ll owe more the longer you hold the loan. While you’re not required to make repayments, you usually have the option to make voluntary repayments to keep loan payments and your balance manageable.
The main fees for a reverse mortgage are:
- Interest Rates: Interest rates typically range around 1% higher than the standard variable rate. Since interest compounds on top of previous interest, your loan balance can grow significantly over time.
- Fees: Common upfront fees include establishment, application, and property valuation fees. Depending on the lender, you may also pay ongoing service fees throughout your loan, as well as discharge or early repayment fees.
Moneysmart’s reverse mortgage calculator is a useful tool for understanding how interest rates will impact your loan amount over time. For example, a $100,000 reverse mortgage at a compounded interest rate could double or triple the total loan amount over 20 years, depending on the rate and whether you make voluntary repayments.
Loan Repayment Terms
You’ll generally repay the loan on your reverse mortgage when you sell your property, move permanently, or pass away. If you die, your estate pays back the loan, so you don’t have to worry about leaving behind a financial burden for your family.
Can You Lose Your Home with a Reverse Mortgage?
In most cases, the answer is no. That’s because you cannot end up owing more on a proprietary reverse mortgage than your home is worth. Australia’s No Negative Equity Guarantee (NNEG) protects you from owing more on your reverse mortgage than the value of your property. It limits the amount owed to prevent compounding interest from leaving you with negative equity.
Benefits of a Reverse Mortgage
Reverse mortgages offer retirees several benefits, including better cash flow, the chance to stay in your home, and flexible access to funds. Other key advantages of reverse mortgages are:
- No Regular Repayments: You don’t have to repay monthly like a standard home loan.
- Spend It Your Way: Whether for regular expenses, a holiday, or a new car, the money is yours to spend as you wish.
- Tax-Free: The Australian Tax Office (ATO) does not consider a reverse mortgage taxable income. You will not pay tax like you do with employment or investment income.
- Limited Impact on Credit Score: A reverse mortgage will appear on your credit report, but it won’t impact your credit score like other loans.
- Protection From Negative Equity: The NNEG protects you from owing more than the value of your home.
- Improved Quality of Retirement: Spend your golden years in comfort instead of scrimping and saving.
- Usually, there is No Change to Age Pension and Benefits. A reverse mortgage isn’t considered income by Centrelink. In most cases, it will not impact your pension, although this depends on various factors, such as the assets test and how you spend the money.
- Avoid Or Delay Downsizing: If the market rises or you don’t want to go through the costs and hassles of downsizing, you can stay in your home while freeing up cash.
Overall, reverse mortgages provide financial flexibility for older Australians who want enough money to enjoy a comfortable retirement but don’t want to leave their home.
Risks and Considerations of a Reverse Mortgage
While reverse mortgages offer many advantages, being aware of the potential downsides is essential. These include:
- Compounding Interest: Interest on a reverse mortgage compound over time, meaning the loan balance snowballs if you don’t repay it, significantly increasing the amount owed.
- Impact on Estate and Inheritance: As your loan balance grows, the amount of equity left in your home decreases, reducing the inheritance you’ll give your children.
- Potential Impact on Pension Benefits: While reverse mortgage funds are generally tax-free, they may impact your Centrelink benefits – especially if you take a lump sum payment that changes your results of the assets test.
- Potential Lifestyle Changes: Life events such as aged care or moving into a retirement village may trigger loan repayment if the home is no longer your primary residence.
- Fees and Costs: Reverse mortgages come with higher fees and interest rates compared to standard home loans.
- Limited Flexibility for Moving: If you decide to sell your home or move, you must repay the reverse mortgage in full. This may limit your options if you want to relocate or downsize.
- Impact on Future Borrowing Power: Taking out a reverse mortgage affects your borrowing capacity for other types of loans because your home equity is reduced.
- Complex Terms and Conditions: Reverse mortgages can be complicated, and their terms and conditions may be challenging to understand. It’s essential to seek financial and legal advice or speak to a mortgage broker who can guide you.
To help you weigh these risks and considerations, we’ve compiled a list of key questions to help you determine if a reverse mortgage is right for you.
Key Questions to Ask Before Taking a Reverse Mortgage
While reverse mortgages can be a lifesaver for cash-strapped retirees, they’re only suitable for some. You should weigh the pros, cons, and circumstances before signing on the dotted line.
Financial Goals and Other Assets
Ask yourself: Does a reverse mortgage align with your overall retirement plan? Will it impact your age pension? Are you okay with reducing your current level of equity in your home? These are critical questions to determine whether a reverse mortgage works, empowers your ideal retirement, or hinders it.
Importance of Inheritance
Do you want to leave a nest egg for your kids or grandkids, or are you aiming to spend your assets down to zero? If your home is a core part of the financial legacy you want to leave behind, you might be better suited to another method of generating income in retirement.
Exploring Alternatives to Reverse Mortgages
If a reverse mortgage doesn’t seem like the right fit, consider other avenues for accessing liquid cash or tapping into your home equity.
- Downsizing: You could sell your home and move into a smaller, more affordable home, using the difference between the sale price and the new home purchase price to fund your retirement.
- Superannuation Drawdown: If you have a large super balance, withdraw money in a lump sum or regular income payments.
- Home Equity Loan: A home equity loan lets you increase your current home loan based on how much equity you’ve built up. It allows you to access a large sum without selling your property or using personal loans with higher interest rates.
- Renovation Loan: If you want to use the cash to renovate your home and increase resale value, you can look at a renovation loan.
Seeking Independent Advice
While it’s great to research and stay informed, you should discuss this decision with professional experts. This includes your financial advisor, lawyer, or a mortgage broker who specialises in reverse mortgages. For guidance, you can check our lists of the top ten reverse mortgage contracts and brokers in Sydney, Melbourne, or Brisbane.
How to Apply for a Reverse Mortgage in Australia
The 7-Step Application Process
Reverse mortgage home loans are heavily regulated in Australia, and the application process can take around 4-6 weeks. Applying for a reverse mortgage involves the following steps:
- Research and Compare Lenders: Speak directly with lenders who offer reverse mortgages or talk to a mortgage broker to compare loan terms across multiple lenders. Your broker will review your loan options, calculate your borrowing power, and determine whether you meet the eligibility criteria.
- Prepare Application and Compliance Documents: Your mortgage broker will help you prepare the necessary forms and supporting documents, such as your ID, bank statements, and council rates notice. You’ll have a meeting to discuss the documents and make sure a reverse mortgage is in your best interests.
- Submit Application: You’ll lodge the application with the lender and any required supporting documents. The lender will review it and conduct a compliance call to ensure you understand how the loan works.
- Property Valuation: Once the lender has completed an initial review of your application, they’ll order a property valuation of your home. The amount you can borrow depends on how much your home is worth.
- Final Approval and Loan Disbursement: Your lender will decide on your loan application. If they approve it, they’ll send you a loan contract.
- Legal Advice: It’s a regulation of reverse mortgages to review the loan contracts with your solicitor. They’ll ensure you understand the legal implications of the loan and sign the contracts.
- Access Funds: Once your lender receives the signed loan contracts from your lawyer, they will arrange registration of the loan and give you access to your funds.
Conclusion
Many Australian retirees have felt the pinch of inflation and the rising cost of living over the past few years. If you don’t have enough cash to fund the retirement you’ve worked hard for but own your own home, a reverse mortgage may be an innovative financial solution. It allows you to borrow against your home equity and access cash without selling or moving out of your home.
Reverse mortgages offer a great range of benefits, such as regular income, an improved quality of life, and negative equity protection. You don’t have to make regular repayments, which makes them a desirable option for some homeowners.
However, like any big financial decision, reverse mortgages have potential risks and downsides. Before you commit, you should weigh up the fees, compound interest costs, and how the loan will fit into your overall financial plan for retirement.
Speak with a mortgage broker today if you’d like expert guidance.
FAQs About Reverse Mortgages in Australia
1. What Is a Reverse Mortgage, and How Does It Work?
A reverse mortgage allows you to borrow against the equity in your home without making regular repayments and pay interest only. The loan balance, including interest, is repaid when you sell your home, move into aged care, or pass away.
2. Who Is Eligible for a Reverse Mortgage in Australia?
To qualify for a reverse mortgage, you generally need to be at least 60 years old, own your home outright or have significant equity, have property taxes and live in the property as your primary residence.
3. How Much Can I Borrow with a Reverse Mortgage?
It depends on your age, home value, homeowners insurance, and the lender. The older you are, the higher the percentage of your home’s value you can borrow.
4. Will a Reverse Mortgage Affect My Pension?
In most cases, Centrelink won’t consider the funds from a reverse mortgage income. However, a lump sum payment could affect your assets test, so it’s essential to check how this may impact your pension.
5. What Happens if I Move into Aged Care?
You may need to repay the loan balance if the home is no longer your primary residence.
6. Can I Make Payments to Reduce My Loan Balance?
While you don’t have to make regular repayments with a loan account or a reverse mortgage, your lender may allow you to make voluntary repayments. This reduces the impact of compounding interest.
7. Do I Need Independent Legal and Financial Advice?
Yes, it’s a requirement for reverse mortgages in Australia to consult with a solicitor to review the loan documents. Financial advice is also highly recommended so you understand the implications and make the best decision for your retirement plan.
“A Reverse mortgage is a great option for people who want to tap into their equity at retirement, there is a reverse compounding affect that you need to take into consideration as well so make sure you do your due diligence”.
Mansour Soltani
MANSOUR SOLTANI
Mansour has spent more than two decades involved in the purchase and sale of real estate, acquiring both investment and commercial properties throughout Australia, including in major cities and smaller regional locations.
He is the proprietor of a finance brokerage firm, overseeing a portfolio worth in excess of 75 million in loans and serving a diverse clientele across Australia and a regular contributor to money.com.au. This has equipped him with extensive knowledge in various investment tactics, allowing him to offer significant insight.
