Written byA reverse mortgage is a secured loan that lets an older homeowner borrow against the equity in their home, with no regular repayments while they live there.
Also known as: home equity release, retirement lending
Key points
- You stay the legal owner and keep living in the home, while the lender registers a charge over the title.
- Interest is added to the balance and compounds, so the debt grows and your equity shrinks the longer the loan runs.
- Funds come as a lump sum, regular payments, or a line of credit where interest accrues only on what you draw.
- The maximum loan to value ratio depends on age and property value, and older borrowers are generally offered more.
- The loan is repaid when the home is sold, or on death or a permanent move into long term care.
How a reverse mortgage works
You agree a limit with the lender, secured by your home, and choose how to take the money: a lump sum, regular payments to top up retirement income, or a line of credit you draw on as needed. You remain the legal owner while the lender holds a registered mortgage over the title.
Because you make no regular repayments, interest is charged and capitalised into the balance, typically monthly, and then earns interest itself. Rates are usually variable. What you can borrow reflects your age, the property value and the lender's rate assumptions. The loan ends when the property is sold, or on death or a permanent move into care, and any equity left over goes to you or your estate.
What it costs and what happens to your equity
Reverse mortgages cost more than mainstream home loans, because of the long duration, the lender's risk and the compounding. On top of the rate, expect an application or establishment fee, a valuation fee, legal and settlement costs, ongoing account keeping fees and a discharge fee when the loan is finally repaid.
The compounding is the part that catches people out, because roll up interest can outpace house price growth and eat into the equity you were counting on. Ask the lender for a schedule of projected balances under different scenarios before you sign. Drawing only what you need through a line of credit keeps the balance, and the erosion of equity, well below taking the full limit as a lump sum at the start.
Eligibility, pension and protections
Lenders usually set a minimum age around 55 to 60, want an owner occupied dwelling, and require permanent residency or citizenship. Some limit units, rural properties or non standard construction. The title should be clear of other mortgages, or the existing lender has to consent to the new charge being registered. Couples can apply jointly, and lenders assess both ages.
Money from a reverse mortgage can affect means tested payments: a lump sum may be treated as an asset or as income depending on timing, while periodic payments are often assessed as income. The home itself is generally excluded from the Age Pension assets test while you live in it. Contact Services Australia, and get independent legal, financial and tax advice. Loans taken out from 18 September 2012 carry statutory negative equity protection, so you cannot be left owing more than the home is worth. Lenders must hold an Australian credit licence and must be members of AFCA.
Example
A 70 year old with a home worth $600,000 and no mortgage is offered a limit of roughly 30% of the value, around $180,000. Taking the full amount as a lump sum starts interest compounding on the whole balance from day one. Taking a line of credit instead and drawing $60,000 for a bathroom renovation means interest accrues only on that $60,000, so a decade later far more equity is still in the house. The difference is not the rate. It is how much is left to roll up, and for how long.
Not to be confused with
- Home loan
- a standard home loan needs regular repayments, while a reverse mortgage rolls the interest up instead
- Line of credit
- an ordinary line of credit has to be serviced, while a reverse mortgage can accrue until the home is sold
Frequently asked questions
Will I lose my home with a reverse mortgage?
No. You stay the owner while the loan is running, as long as you meet the loan terms, which usually include keeping the property insured and paying rates and strata levies. The lender's charge is repaid out of the sale proceeds when the home is eventually sold.
Can I move house if I have a reverse mortgage?
Some lenders allow the loan to move to a new property, subject to valuation and conditions, while others require it to be repaid on settlement. Portability is not standard, so check the terms before you borrow rather than at the point you want to move.
Can my children still inherit the home?
If the loan balance is less than the sale proceeds, whatever is left passes to the estate. Reverse mortgages taken out from 18 September 2012 carry statutory negative equity protection, so you cannot end up owing more than the home is worth. Only pre-September 2012 contracts need checking.
Does a reverse mortgage affect the Age Pension?
It can. A lump sum may be treated as an asset or as income depending on how and when you receive it, while regular payments are often assessed as income. The home is generally exempt from the assets test while you live in it. Check with Services Australia.
Are reverse mortgages regulated in Australia?
Yes. Lenders must hold an Australian credit licence, comply with consumer credit protections and must be members of AFCA, the single external dispute resolution scheme. ASIC and MoneySmart publish guidance for borrowers, and taking independent legal and financial advice before signing is strongly recommended.
Related terms
Home loan
A home loan is a secured loan used to buy property or fund major home projects, with the lender taking a mortgage over the property as security.
Read definitionMortgage
A mortgage is the legal charge a lender registers over property to secure a loan, giving it the right to sell the property if you default.
Read definitionLine of credit
A line of credit is a revolving credit facility with an approved limit that you can draw, repay and redraw, paying interest only on the drawn balance.
Read definitionLoan-to-value ratio (LVR)
A loan-to-value ratio (LVR) is the amount you borrow as a percentage of the value of the security, usually property, and a key measure of lending risk.
Read definitionCompound interest
Compound interest is interest calculated on both the original principal and the interest already added in earlier periods, so balances and debts grow faster than with simple interest.
Read definitionSecurity (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.