Plenty of Australian retirees are asset-rich and cash-poor. The house has done well over thirty years. The income to run a life in it has not followed, because there is no salary any more and the pension only stretches so far.
A reverse mortgage is one way out of that squeeze: you borrow against the equity in your home, keep living in it, and make no repayments while you are there. It is also expensive, and it eats the inheritance. Here is how it actually works, what it costs, and when it is the wrong answer.
What a reverse mortgage is
A home loan that turns part of your equity into cash. You make no regular repayments. Interest is added to the balance and compounds. The whole lot is repaid when you sell, move out permanently, or die.
That last point is the one people miss. Nothing leaves your pocket month to month, so the cost is invisible until the balance is settled.
Who can get one
Lenders differ, but the common requirements are:
- Age 60 or over. A few lenders start at 55, most at 60.
- It has to be your home. Investment properties and holiday houses do not qualify.
- Real equity. Owned outright, or close to it.
How much you can borrow rises with age. At 60 you might get 15 to 20% of the home’s value. That climbs roughly one percentage point a year, so a borrower over 75 is often looking at 30 to 40%. The loan-to-value ratio the lender applies is set by your age.
Property types. Free-standing houses, townhouses and most apartments are fine. High-rise apartments, homes in development zones, rural blocks and anything with a complicated ownership structure are often knocked back.
Who still offers them
Fewer lenders than you would think. After the 2017 banking royal commission, Westpac, Bankwest, Macquarie and Commonwealth all pulled their reverse mortgage products. The market is now a handful of specialist lenders plus the federal Home Equity Access Scheme, which Services Australia runs at a lower rate than the commercial products and is worth pricing first.
Volumes are rising again as living costs bite.
What people use the money for
- Income. Topping up a pension when there are no dividend shares or rental property behind you.
- Medical costs. Premiums and out-of-pocket bills that arrive at the worst time.
- Renovations. Usually access and safety work rather than a new kitchen — see renovation loans.
- Everyday expenses. Groceries, rates, insurance, car.
- Helping family. A deposit for a child buying a first home, or fees for a grandchild.
Jack Mckenna
Financial Services Expert
“For many retirees, the challenge isn’t a lack of wealth, it’s that their wealth is locked away inside the family home. We regularly see clients who have benefited from decades of property growth but are now trying to balance rising living costs with limited retirement income.
A reverse mortgage can be a useful strategy in the right circumstances, but it shouldn’t just be viewed as a way to access extra cash. The long-term impact on equity, estate planning and future lifestyle choices needs to be carefully considered before making a decision.”
Jack Mckenna – Director, North Brisbane Mortgage Brokers
How the money comes to you
Three ways, and lenders vary on which they offer:
- Lump sum. All of it at once. Interest starts compounding on all of it at once too.
- Line of credit. Draw what you need, when you need it. Interest only on what you have drawn. Almost always the cheaper structure.
- Regular payments. A set amount monthly or quarterly, which behaves most like an income.
What it costs
Reverse mortgages price above standard home loans, generally around one percentage point over the standard variable rate. Add establishment, application and valuation fees up front, then possibly an ongoing service fee, and a discharge or early repayment fee at the end.
The rate is not the problem. The compounding is. A $100,000 balance at reverse mortgage rates can double or triple over twenty years, because each year’s interest earns interest of its own. Moneysmart’s reverse mortgage calculator shows this on your own numbers in about two minutes, and anyone considering one should run it before anything else.
You are allowed to make voluntary repayments. Most people do not. The ones who do end up with a far smaller balance to settle.
When it has to be repaid
When you sell, when you move out permanently, or when you die. If you die, the estate settles it out of the sale.
Can you lose the house? No. Australia’s No Negative Equity Guarantee means you can never owe more than the property is worth. If the compounding balance overtakes the value of the home, the lender wears the difference, not you or your estate.
The upside
- No monthly repayment.
- The money is yours to spend however you like.
- The ATO does not treat it as income, so there is no tax on it.
- It appears on your credit file but does not damage your credit score.
- The No Negative Equity Guarantee caps your downside.
- You stay in the house instead of downsizing.
- Centrelink generally does not count it as income, though how you hold and spend it can affect the assets test.
The downside
- Compounding. The balance grows quietly and quickly. This is the single biggest cost.
- The inheritance shrinks. Every dollar of interest is a dollar your children do not get. Have that conversation before you sign, not after.
- The pension. A lump sum sitting in a bank account is an asset, and the assets test can reduce your payment.
- Moving. Aged care or a retirement village means the home is no longer your residence, and the loan falls due.
- Cost. Higher rate and more fees than a standard loan.
- Future borrowing. With equity gone, so is your capacity to borrow against the house for anything else.
- Complexity. The contracts are long and the maths is not intuitive. Legal advice is mandatory for a reason.
Three questions to answer first
Does it fit the rest of your retirement plan? Consider the pension, your super, and how comfortable you are with the equity going down rather than up.
How much does leaving an inheritance matter? If the house is the legacy, this is probably the wrong product. If you intend to spend down what you have, it is a reasonable tool.
Have you priced the alternatives? Downsizing frees more cash and costs no interest, though it costs stamp duty and upheaval. Drawing on super may be cheaper if the balance is there. A home equity loan gives you a lump sum with repayments you can service. A renovation loan is better if the money is going into the house.
The Home Equity Access Scheme belongs on that list too. It is usually the cheapest option available and it is often overlooked.
Getting advice
A solicitor has to review the contract before you sign; that is a legal requirement, not a suggestion. A financial adviser and a broker who does this work regularly are both worth the time, because the number of lenders is small and their policies differ more than you would expect. Our broker shortlists are Sydney, Melbourne and Brisbane.
The application, step by step
Four to six weeks, start to finish.
- Compare lenders. A broker checks your eligibility, works out your borrowing power and puts the options side by side.
- Get the paperwork together. ID, bank statements, rates notice. There is a meeting to confirm the loan suits you.
- Lodge. The lender reviews it and rings you to check you understand how the loan works.
- Valuation. The lender orders a property valuation. What you can borrow depends on the result.
- Approval. The lender issues a contract.
- Legal review. Your solicitor goes through it with you, and you sign.
- Funds released. The lender registers the loan and pays out.
Who is eligible for a reverse mortgage in Australia?
Generally 60 or over, living in the property as your main residence, and owning it outright or with substantial equity. A small number of lenders start at 55.
How much can I borrow?
It depends on your age and the value of the home. Around 15 to 20% at 60, rising roughly a percentage point each year, so 30 to 40% for borrowers over 75.
Will it affect my pension?
Centrelink does not treat the loan as income. But money sitting in your account is an asset, so a large lump sum can reduce your payment through the assets test. Drawing smaller amounts as you need them usually avoids that.
What happens if I move into aged care?
The home stops being your main residence, which makes the loan repayable. If you are likely to move within a few years, factor that in before you borrow.
Can I pay some of it back early?
Yes, most lenders allow voluntary repayments, and they make a real difference. Paying the interest as it accrues stops the balance compounding at all. Check for early repayment fees first.
Mansour Soltani
Financial Services Expert
“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, Director, Soren Financial Mortgage Brokers
MANSOUR SOLTANI
Mansour has spent more than two decades buying and selling property across Australia, both investment and commercial, in capital cities and regional towns. He runs a finance brokerage overseeing a loan portfolio of more than $250 million, and contributes regularly to money.com.au.