Did you know your home could do much more for you in retirement than just giving you a roof over your head?
With a reverse mortgage, you can tap into the equity in your home—the portion of its value you’ve paid off over the years—to fund your lifestyle, cover unexpected expenses, or enjoy greater financial freedom in retirement.
What is a reverse mortgage?
We’re here to answer that question and break down everything you need to know, from how reverse mortgages work to their potential benefits and pitfalls.
Understanding Reverse Mortgages in Australia
A reverse mortgage in Australia is a loan for homeowners aged 60 and over that allows them to access some of the equity in their home without selling it.
If you’re a retiree who owns most or all of your home and needs extra funds for living expenses, medical costs, home renovations, or a more comfortable retirement, a reverse mortgage could be the way to go.
How does a reverse mortgage work?
- Eligibility: You must meet the age requirement, and your home must have sufficient equity.
- Accessing Funds: Do you want the money as a lump sum, regular payments, a line of credit, or a combination of these? The choice depends on your financial needs and goals.
- Valuation: The lender will assess the value of your home to determine how much equity you can borrow. Your age and the lender’s policies influence this.
- Loan Approval and Setup: Once the reverse mortgage loan is approved and set up, you remain the owner of your home and don’t need to make regular loan repayments.
- Interest: Interest is charged on the loan balance and compounds because there are no repayments. Over time, the total amount owed increases.
- Repayments: The loan is repaid when you sell your home, move into permanent aged care, or pass away. Any remaining equity goes to you or your heirs through your estate.
Types of Reverse Mortgages
Traditional Reverse Mortgage
A traditional reverse mortgage is the most common type of reverse home loan, as outlined above.
Pros
- No Monthly Repayments: Unlike a typical loan, you don’t have to worry about making monthly repayments.
- Stay in Your Home: You remain the property owner and can live in your home as long as you want, provided you meet the loan terms.
- Flexible Payout Options: You can choose a lump sum, regular payments, or a line of credit.
- Tax-Free Funds: The money you borrow isn’t considered taxable income.
- No Negative Equity Guarantee: In Australia, you can’t owe more than the value of your home when it’s sold, offering peace of mind.
Cons
- Interest Builds: Since you don’t make repayments, the loan amount grows as interest compounds, significantly reducing the equity in your home.
- Impact on Inheritance: The more you borrow and the longer you hold the loan, the less equity will be left for your family.
- Variable Interest Rates: Only variable interest rates are available, which means your rate can go up or down depending on market conditions, potentially increasing the total loan balance faster than expected.
- Higher Fees: Reverse mortgages often have higher fees than traditional home loans, including establishment fees, valuation fees, and service fees.
- Borrowing Limits: You can only access a portion of your home’s value, and the amount depends on your age and lender policies.
- Ongoing Obligations: You must maintain your home, pay rates, and keep up with home insurance. Failure to do so can breach the loan terms.
Line of Credit Reverse Mortgage
With a line of credit reverse mortgage, instead of receiving all the money upfront, you set up a credit limit you can draw from whenever you need funds.
You only borrow what you need and pay interest on the amount you use.
Pros
- Interest Only on Borrowed Amount: You only pay interest on the money you withdraw. In a traditional reverse mortgage, interest accrues on the entire loan amount from the start, even if you don’t use it all at once.
- Flexible Access to Funds: Drawing funds as needed gives you better control over your cash flow.
- Potential to Borrow More: With some line of credit loans, the unused portion of the credit grows over time, so you may be able to access more funds later.
Cons
- Active Management: You must carefully plan and track withdrawals to avoid using more equity than intended. This level of management is less necessary with a traditional reverse mortgage, where funds are fixed.
- No Lump Sum Availability: While traditional reverse mortgages can provide a single, large payment upfront, a line of credit provides smaller, flexible withdrawals. If you need a significant amount immediately, this might not be ideal.
- Risk of Overdrawing: The flexibility to withdraw funds as needed can lead to excessive borrowing if not monitored, quickly depleting your home equity.
Variable Interest Rates
Only variable interest rates are available for reverse mortgage loans.
Instead of staying the same, like with a fixed rate, a variable rate can change over time, going up or down depending on changes in the market or your lender’s policies.
Because you’re not making loan repayments, the lender calculates and adds interest to the unpaid loan balance each month.
This balance includes the original amount you borrowed and interest from previous months.
As a result, even small increases in the interest rate can quickly grow the total amount you owe when you sell your home, move into permanent aged care, or pass away.
Is a Reverse Mortgage Right for You?
Here’s what you need to know to make an informed decision.
Age and Equity Requirements
You must be 60 or older to qualify for a reverse mortgage in Australia.
The amount you can borrow depends on your age and the equity in your home.
Generally, the older you are, the more of your home’s value you can access.
Most lenders require that the property be your primary residence and meet certain conditions, such as being well-maintained and located in an approved area.
Impact on Age Pension and Government Benefits
While the money you receive from a reverse mortgage isn’t considered income, how you use the funds could impact your eligibility for the Age Pension and other government benefits.
For example, using the money to invest or buy a second property might reduce the amount of pension you receive.
Check with Centrelink or a financial advisor to understand how a reverse mortgage might influence your benefits.
Reverse Mortgage Checklist
- Do you need funds for essential expenses, medical costs, or to improve your quality of life?
- Are you comfortable with reducing the inheritance left to your family?
- Have you explored all other options, such as downsizing, using superannuation, or accessing government support?
- Can you manage the ongoing obligations, such as maintaining your home, paying rates, and keeping your home insurance up to date?
- Do you understand the long-term financial impact, including how interest builds and how it will affect your home equity?
If you answered “yes” to these questions, a reverse mortgage could be a suitable option for helping you meet your financial needs and enhance your quality of life in retirement.
Tips for Making an Informed Decision
Seeking professional advice is a vital first step when considering a reverse mortgage.
A financial expert can help you fully understand the risks and benefits so that your decision aligns with your circumstances and financial goals.
It’s also important to compare interest rates, fees, and loan features from different lenders to find the best option.
Every lender offers slightly different terms; careful comparison can save you money and provide more flexibility in the long run.
Finally, discuss your plans with your family.
A reverse mortgage can affect your family’s inheritance, so involving them in the decision-making process makes sure everyone is on the same page and avoids future misunderstandings.
Reverse Mortgage Alternatives
If you decide a reverse mortgage isn’t right for you, what are your options for accessing extra funds?
- Downsizing: Selling your current home and purchasing a smaller, less expensive property.
- Home Equity Loan: Borrowing against the equity in your home, similar to a reverse mortgage, but with regular repayments. A good option if you have a steady income to cover repayments and want to access funds without selling your property.
- Accessing Superannuation: Drawing on superannuation savings if you’re of retirement age.
- Australian Government Programs: Taking advantage of programs like the Pension Loans Scheme, where you can borrow money against your home while receiving regular pension payments. Other programs, such as health or home renovation grants, may also provide financial assistance.
Making Informed Decisions About Your Home Equity with Pherrus
What is a reverse mortgage?
It’s a way to turn your home’s value into cash while still living there!
Is a reverse mortgage the right fit for your future?
Contact Pherrus today for a free consultation with one of our experienced financial experts.
They will help you uncover the best options for your financial future and guide you toward making confident, informed decisions.
Simply fill out our online form or call (02) 9099 9109 to book an appointment at our Bella Vista office in Sydney, NSW.
FAQs About “What Is a Reverse Mortgage?”
What Is the 95% Rule on a Reverse Mortgage?
The 95% rule stops the mortgage lender from claiming more than 95% of the home’s sale price when the loan is repaid, even if the outstanding loan balance is higher.
This rule ensures the borrower or their estate won’t owe more than the home’s value when it’s sold.
What Is the Difference Between a Reverse Mortgage and a Reverse Purchase?
A reverse mortgage lets you borrow against the equity in your current home while staying in it without paying monthly loan repayments.
With a reverse purchase, you can buy a new home using a reverse mortgage, combining the purchase price and loan balance into one without requiring monthly payments.
What Happens if You Live Too Long on a Reverse Mortgage?
If you live longer than expected, you can stay in your home as long as you meet the loan terms (e.g., maintaining the property and paying rates/home insurance).
However, the loan balance will continue to grow as interest compounds, reducing the equity left in your home over time.
