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Home / In retirement / Income in retirement

Reverse mortgages: What are they and how do they work?

December 2, 2020 by Janine Mace Leave a Comment

Reading time: 4 minutes

On this page

  • What are reverse mortgages?
  • What are my loan options?
  • Lenders offering reverse mortgages
  • Reverse mortgages: Pros and cons
  • Rules protecting reverse mortgage borrowers
  • Impact of a reverse mortgage on your Age Pension

One way to unlock some of the money you have tied up in your home is to take out a reverse mortgage. These products work a bit like a home loan – but in reverse.

In the right situation, a reverse mortgage can be a great help if the income from your super and savings don’t quite meet your regular retirement expenses.


Need to know

Reverse mortgages are complex financial products, so always seek independent legal and financial advice on the impact of this type of loan on your home and overall finances before signing up.

It’s also important to consider the potential impact of a reverse mortgage on your potential longer-term retirement expenses like aged care.


What are reverse mortgages?

A reverse mortgage is a different form of home loan than the one you originally used to buy your home. A reverse mortgage allows you to borrow money against the equity (value of your home less any mortgage debt) you built up in your home as you repaid your mortgage over the years.

Lenders often prefer to call these financial products ‘equity release’ or ‘home equity’ schemes, as that name sounds a little more appealing than calling it a mortgage product.


Good to know

With a reverse mortgage, interest is charged just like a normal home loan but you don’t have to make regular repayments. Instead, the interest you are charged on your loan amount compounds over the years and is added to the initial loan amount.

Borrowers can repay their loan in full – or in part – at any time, generally without any penalty.

With a reverse mortgage, you retain ownership of your home and can remain there for as long as you wish. You are free to sell your home and repay your loan at any time. Alternatively, you can allow your loan to continue until your estate is wound up, at which point the loan is repaid.


Generally, reverse mortgages are only available to borrowers aged 60 and over, with the money from your loan being drawn down as a lump sum, regular income stream or line of credit.

The maximum amount of equity you can withdraw with this type of loan varies between providers (currently 34–50% of the property’s value). The loan amount is calculated using your age to ensure you retain adequate equity in your property.


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Need to know – Home reversion

Some lenders in this area offer a ‘home reversion’ product that allows you to sell a proportion or share (for example, 25%) of the future value of home while you are still living there. In return, you receive a lump sum and retain the remaining equity in your home.

These products are not a loan, so there is no interest. Instead you pay a fee for the transaction and when you sell your home, you pay the lender their share (in this case 25%) of the proceeds from the sale.


What are my loan options?

Most reverse mortgage lenders offer considerable flexibility in their products and how you choose to draw down on them.

You can choose to make multiple regular or irregular drawdowns, or choose to take a single lump sum.

You can use your loan for a variety of purposes or strategies, including boosting your regular retirement income, or taking a lump sum for a particular purpose (such as paying for a family wedding, holiday, home maintenance or an aged care deposit).

Some lenders also allow you to tap into the equity in your investment property or holiday home, or even refinance your existing mortgage into a reverse mortgage.

Lenders offering reverse mortgages

Currently there are only a few specialist lenders offering reverse mortgages, with none of the big banks offering these products. The main reverse mortgage lenders in the market currently are:

Important: These are not recommendations or endorsements for any of these providers

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Specialist reverse mortgage lenderProduct options
Domacom– Seniors Equity Release
G&C Mutual Bank– Retirees Access Home Loan
Heartlands Seniors Finance– Standard Reverse Mortgage
– Secondary Property Reverse Mortgage
– Aged Care Option
Household Capital– Reverse Mortgage Variable Home Loan
– Refinance Variable Home Loan
IMB Bank– Reverse Mortgage Loan
P&N Bank– Reverse Mortgage Home Loan

Information current as at 1 December 2020

Interest rates for these products vary from 4.95% to 5.8% (December 2020), depending on the individual lender’s product

Each lender offers a variety of products, with different strategies available depending on your requirements. The interest rate, cost, repayment requirements and loan-to-valuation ratio (LVR) vary by lender and product.


Need to know:

The federal government also offers a form of reverse mortgage – the Pension Loans Scheme (PLS) – which provides a regular income stream to eligible borrowers.

By comparison, the current interest rate for a PLS loan is 4.5%. For a more detailed explanation of the PLS, read SuperGuide article What is the Pension Loans Scheme, and how does it work?.


Reverse mortgages: Pros and cons

Like most financial products, there are both benefits and drawbacks with a reverse mortgage:

Pros

  • Regular repayments are not required
  • Repayment of the loan comes when the home is sold, or from your estate
  • You benefit from any increase in the property’s value
  • Interest is calculated on the outstanding loan balance and is added to the loan balance each month
  • Voluntary repayments can be made at any time
  • Interest rates are usually lower than personal loans or credit cards
  • Interest rates are generally variable
  • Avoids the need to downsize or move away from family and friends
  • Some lenders allow you to borrow against a holiday home or investment property

Cons

  • Interest rates generally higher than for regular mortgages
  • Interest rates currently higher than the federal government’s Pension Loan Scheme (PLS)
  • Compounding interest makes the loan balance increase quickly
  • Additional charges can include establishment fees, monthly/annual fees, switching fees and discharge fees
  • Reduces the capital available for future costs like home improvements or medical expenses
  • Limits the capital available for a residential aged care deposit
  • Reduces the size of your estate remaining for your family and your other beneficiaries
  • Leaves less equity compared with downsizing to a smaller, cheaper home
  • Some reverse mortgage lenders require you to obtain their permission before selling, leasing, vacating or renovating your property
  • A non-title-holding resident may have to move out when the loan becomes repayable on your death.

Case study

Angela is aged 65 and lives with her husband Tom (aged 68) in their home (currently valued at $850,000) in an inner Melbourne suburb. They live close to family and friends, so are reluctant to downsize. Angela and Tom are not receiving any Age Pension payments and don’t want to apply for the government’s Pension Loans Scheme.

Although their super balance covers most of their retirement expenses, they would like to boost their monthly income by taking out a reverse mortgage.

Given their age and property value, ASIC’s MoneySmart Reverse Mortgage Calculator calculates the maximum amount they can take out in a reverse mortgage loan is $212,500, which is 25% of their home’s current value. The minimum available loan amount would be $20,000.

Case study

Angela is aged 65 and lives with her husband Tom (aged 68) in their home (currently valued at $850,000) in an inner Melbourne suburb. They live close to family and friends, so are reluctant to downsize. Angela and Tom are not receiving any Age Pension payments and don’t want to apply for the government’s Pension Loans Scheme.

Although their super balance covers most of their retirement expenses, they would like to boost their monthly income by taking out a reverse mortgage.

Given their age and property value, ASIC’s MoneySmart Reverse Mortgage Calculator calculates the maximum amount they can take out in a reverse mortgage loan is $212,500, which is 25% of their home’s current value. The minimum available loan amount would be $20,000.

Angela and Tom estimate their home will increase in value 3% annually and decide they would like to receive regular monthly payments of $1,000 over the next 15 years. (The interest rate charged by their reverse mortgage lender is 5.4% per year, with a $395 establishment fee and an annual ongoing fee of $80.)

In 15 years, when Angela is aged 80, their home is expected to be valued at $1,324,272 and the loan amount they will owe will be $279,072. This will leave Angela and Tom still owning 79% of their home’s equity ($1,045,201).

These figures will change if the interest rate changes, or if their home doesn’t appreciate in value the way they expect. For example, if the interest rate on their loan rises 2%, they will then owe $382,271 to their lender and own only 71% of their home’s equity ($942,002). Or if the value of their home doesn’t increase in value and remains constant, in 15 years they will only own 67% of their home’s equity ($570,928).

Case study results sourced by the author using the ASIC MoneySmart Reverse Mortgage Calculator and current market interest rates as at 1 December 2020.


Rules protecting reverse mortgage borrowers

Since September 2012, all new reverse mortgage contracts must include a protection guarantee to ensure you cannot end up owing your lender more than the value of your home when it is eventually sold.

This guarantee protects you from going into negative equity (when the value of your home is less than the outstanding balance on your loan), but it doesn’t stop the majority of the equity you have accrued in your home being eroded by the compounding interest charged on your loan.

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Need to know

If you hold a reverse mortgage over a long period, you can end up with very little equity in your home when you terminate your loan.

This may cause problems if you or your partner need a significant lump sum for an expense like a medical procedure, or a refundable accommodation deposit (RAD) for residential aged care.


To avoid eroding all the equity in your home, some reverse mortgage products allow you to protect a portion of your equity for your estate (usually called protected equity). If you do this, the amount you will be able to borrow will be smaller.

ASIC requires reverse mortgage lenders to provide loan applicants with a printed projection showing how their home equity will decrease over time and the impact of different interest rates on a reverse mortgage loan with a variable interest rate.

Impact of a reverse mortgage on your Age Pension

Taking out a reverse mortgage does not generally make you ineligible for the Age Pension, but you need to take care as Centrelink does impose conditions on any payments:

  • Income test: Generally, the amount drawn down under a reverse mortgage is not counted as income by Centrelink. But if it is invested, it will then be deemed or counted as income. Learn more about the Age Pension income test.
  • Assets test: Generally, the first $40,000 of a lump sum withdrawal from a reverse mortgage is exempt from the assets test for 90 days. If the money is not spent within the time limit, it will be counted as an asset. Different rules apply depending on whether the money is spent on assessable assets, maintenance or improvements to your home, or gifted to another person or family. Learn more about the Age Pension assets test.
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Learn more about how the home affects retirement in the following SuperGuide articles:

Home ownership and super are far more entwined than you might think

December 11, 2020

Video: Home equity release for retirees

December 1, 2020

Your home: The foundation of retirement planning

November 24, 2020

What matters is the home: Review finds most retirees well off, some very badly off

November 23, 2020

What is the Pension Loans Scheme, and how does it work?

September 2, 2020

Saving for retirement outside super

February 5, 2020

Location the missing ingredient in retirement planning

February 1, 2020

How does the First Home Super Saver (FHSS) Scheme work?

January 14, 2020

Making downsizer super contributions: 10 things you need to know

December 16, 2019

Learn more about retirement income in the following SuperGuide articles:

How to maximise your Age Pension

September 17, 2020

What is the Pension Loans Scheme, and how does it work?

September 2, 2020

Rules of Thumb: Do these popular retirement planning hacks measure up?

May 7, 2020

How can you plan your income needs in retirement?

April 1, 2020

Worried about your post-virus finances? 10 tips to help stretch your retirement dollars

April 1, 2020

Is a bucket strategy the solution for your retirement income plan?

March 23, 2020

How much super do I need to retire?

February 11, 2020

How inflation affects your retirement income forecast

August 10, 2019

‘Today’s Dollars’: The impact of inflation on retirement income

April 8, 2019

Retirement income in Australia: An overview

February 18, 2019

Target retirement income: An explanation of the 66-80% rule of thumb

February 8, 2019

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If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

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