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With cost-of-living pressures continuing to bite, many Australians are finding it increasingly difficult to make ends meet and it can be even tougher if you’re retired.
While you may own a home that’s soared in value over the years, the growth in your income to pay the bills is unlikely to have kept pace with property values or inflation.
If you find yourself asset rich but income poor, one solution can be to unlock some of the money tied up in your home through a reverse mortgage. These financial products work a bit like a traditional home loan – but in reverse.
It’s a strategy an increasing number of people over age 60 are using to create more income in retirement, or to pay for lumpy expenses like holidays or a new car.
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 and property values increased.
There are a range of products in this area and each is slightly different. Aside from traditional reverse mortgages, there are also newer products such as reverse equity release and home reversion arrangements.
If you are thinking about using one of these products, it’s important to understand how it works and compare it to other products on offer in this area.
Generally, reverse mortgages are only available to borrowers aged 60 and over, with the money from your loan 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. The current maximum at age 60 is likely to be around 15–20% of the property’s value. This is to ensure you retain adequate equity in your property over the term of the loan.
The minimum loan amount also varies, but most lenders are unlikely to offer a loan for less than $10,000. The amount of your loan will also be affected by your age, with higher amounts available as you get older.
What are my loan options?
Most reverse mortgage lenders offer flexibility in their products and how you choose to draw down on them.
You can choose to make multiple regular or irregular drawdowns, take a single lump sum, or choose a combination of drawdowns and 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.
According to Heartland, one of the largest reverse mortgage providers in Australia, aside from extra income to manage cost-of-living pressures, many borrowers are currently using funds from their reverse mortgage for minor home improvements to help them age in place. The money allows them to remain in their home by making it more retirement-friendly as they age.
Lenders offering reverse mortgage style products
Currently there are less than a dozen specialist lenders offering reverse mortgage style products, with none of the big four banks offering them. The main lenders in the market listed on the ASIC Reverse Mortgage Calculator are:
Important: These are not recommendations or endorsements for any of these providers
|Lender loan limit
|Loan to value ratio (LVR)
|Standard Reverse Mortgage
|Senior Equity Release*
|G&C Mutual Bank
|Retirees Access Home Loan (Reverse Mortgage)
|Heartlands Seniors Finance
|Standard Reverse Mortgage
|Aged Care Option (5-year term)
|Aged Care Loan (3-year term)
|Aged Care Loan (5-year term)
|Equity Advantage (5-year term)
|Equity Empower – Standard Reverse Mortgage
|Easy Living Loan – Metro
|Easy Living Loan – Non-Metro
Information current as at 1 December 2023. Loan providers and details sourced from ASIC Reverse Mortgage Calculator.
*Note: Both Homesafe and DomaCom are forms of equity release products, rather than traditional reverse mortgage products.
Reverse mortgage lenders offer a variety of products suited to borrowers with different requirements (such as aged care payments or those needing a small lump sum).
As with traditional home mortgages, the interest rates, fees, repayment requirements and LVR for a reverse mortgage vary depending on the particular lender and product, so it’s worth shopping around.
Current interest rates for reverse mortgage products vary significantly, ranging from 5.57% to 9.37% (at 1 December 2023) depending on the individual product, so again, make sure you do your homework before signing up.
Reverse mortgages: Pros and cons
Like most financial products, there are both benefits and drawbacks with a reverse mortgage:
- 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
- Interest rates generally higher than for regular mortgages
- Interest rates are currently higher than the federal government’s Home Equity Access Scheme
- Interest rates are generally variable rather than fixed
- 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.
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’s 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.
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 is usually 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 be careful 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.