A reverse mortgage or home equity release is a loan, funding facility, or equity selldown, designed to access some of the equity in your home while you continue to live in it.  It is only available to over-60s in Australia.

Home equity release or reverse mortgages are often used by someone instead of downsizing their home to free up capital to either modify their home, pay medical expenses or care costs, help with the cost of living after retirement, and help with large ticket lifestyle purchases.

The Australian Government has made it very clear that they expect retirees to use the equity they have built up in their homes to fund their retirement needs. Read on to understand more about how reverse mortgages work and how they might be suitable for you.

What is a reverse mortgage? Who is eligible?

A reverse mortgage is a type of home loan specifically for pensioners and retirees who are ‘asset rich’ but ‘cash poor’. It lets people from the age of 60 who own or mostly own their home, convert the equity in their property (the amount they have paid off) into cash for any worthwhile purposes, so they can remain in their home for longer. Examples of purposes include: paying medical bills, making home renovations/adaptations, and paying for in-home care and other services (such as cleaning or mowing).

The loan is called a reverse mortgage because instead of making monthly payments to a lender (as with a traditional mortgage) the lender makes payments to the borrower. You can choose to receive the payments as a lump sum, a regular income stream, a line of credit, or a combination of these. Reverse mortgage is the most popular form of home equity release in Australia. No income is required to qualify for a reverse mortgage, but not everyone is eligible. For example, apartments and townhouses are not always eligible, and some postcode restrictions may apply.

What are the benefits of a reverse mortgage?

The main benefit of a reverse mortgage is that it allows you to remain in the comfort of your own home for longer. It enables you to pay for in-home/external (medical) care and services (such as cleaning and gardening) and make adjustments/renovations to your home (such as a chair lift and safety handrails). This alleviates financial pressure and the stress of moving house. It also allows you to stay connected to your neighbours and community, all of which may boost your well-being. 

It also means that you can own your home for as long as you choose, and continue to benefit from any growth in its value, which has been substantial in recent years in Australia. Reverse mortgages also allow you to potentially help your children or grandchildren with their house deposit or school fees etc.

How and when do you repay a reverse mortgage?

Unlike a regular mortgage, you don’t have to repay a reverse mortgage until all borrowers on the loan either sell the house, move into aged care, or pass away. However, many lenders allow you to make voluntary repayments if you want to. Ultimately, you must repay the loan in full, including interest and fees.

What are the costs (fees and interest rates) for reverse mortgages?

With reverse mortgages, there are one-off upfront fees (including the application fee, settlement fee, documentation fee, and legal fee) and then ongoing fees that are typically added each month. Also added each month is the interest, and that interest compounds (so you pay interest on the interest). This means that the younger you are when you take a reverse mortgage, and the more you borrow, the less equity you will have in the future.

Fees and interest rates on reverse mortgages are typically higher than for a standard mortgage, as the repayments are delayed until the end. In the past, lenders offered a range of different interest rate options, such as fixed, capped, and variable. But there are now only variable interest rates for reverse mortgage loans. In mid-2021, the average variable interest rate for a reverse mortgage in Australia was about 5.3 per cent per annum. 

If a reverse mortgage is repaid (in full) and ended early, break costs may or may not apply. These can be very high (thousands of dollars) depending on the size of the loan and how long you’ve had it, so it’s a good idea to check with lenders.

Can you lose your home through a reverse mortgage?

No. When you take out a reverse mortgage, the title to your home remains with you, so you can’t lose your property.

Can you end up owing more than the value of your home?

The Australian government’s 2012 consumer credit reforms included protection against negative equity in reverse mortgages. This means that, by law, lenders must guarantee that when your reverse mortgage contract ends and your home is sold to repay the loan, you will not have to pay back more than the value of your home. There are few exceptions to this rule.

How much can you borrow with a reverse mortgage?

Typically, the older you are, the more you can borrow. It depends on the lender, but, here are the general guidelines:

• At 60, you can borrow 15-20 per cent
• At 65, you can borrow 20-25 per cent
• At 70, you can borrow 25-30 per cent
• At 75, you can borrow 30-35 per cent
• At 80, you can borrow 35-40 per cent
• At 85, you can borrow 40-45 per cent

The maximum amount is usually 50 per cent of the agreed value of the house at age 90. The minimum amount varies, but it’s usually about $10,000.

What’s the average loan term for a reverse mortgage?

The loan term of a reverse mortgage is the duration that you remain living in your home after taking out the mortgage, so it varies from person to person. According to Forbes Magazine, the average term is about seven years in the United States. Australian stats in this area are hard to come by.

What if I change my mind and want to opt-out of a reverse mortgage?

You can usually opt-out within a cooling-off period, which can range anywhere from 10 to 30 days, depending on where you reside and your lender’s terms. You should then get a refund for your settlement fee, interest, and the standard cost of a valuation. You won’t see a refund on any independent legal fees or financial advice and government charges, though.

What are the other ways to access the equity in your home? 

1. Home reversion schemes: Home reversion allows you to sell a proportion (a ‘share’ or ‘transfer’) of the future value of your home while you live there. You get a lump sum and keep the remaining proportion of your home equity.
2. Equity release agreement: This allows you to sell a portion of the value of your home for a lump sum or instalment payments. You get to live in your home and pay fees for the portion you’ve sold. Your proportion of equity reduces over time, to cover the fees you pay.

Centrelink’s Pension Loans Scheme: This initiative to support retirees allows approved people eligible for the Age Pension to access capital tied up in their assets. It’s paid in regular fortnightly instalments (on top of the pension). The total amount you can borrow under this scheme is dependent on the value of your property, the equity you wish to keep in it, and your age. But your combined pension and loan payments cannot exceed 1.5 times the maximum fortnightly pension rate. The benefit is that the payments you receive aren’t subject to income tax. And you don’t have to offer all your real estate assets to get the loan if you meet other conditions. You can make repayments or stop your loan payments at any time. But you must repay the loan, all costs, and accrued interest to the government when you die.

What alternatives are there to accessing the equity in your home?

1. Downsizing: Selling your house and moving into a smaller, more affordable property is a common choice among retirees.
2. Refinancing: Refinancing any existing loans to lower monthly payments can free up some cash and allow you to retain the full amount of equity as an asset for you and your family. 
3. Renting out part of your home: Renting out a part of your home (i.e. a room or separate granny flat) on a weekly, weekend, or holiday-only basis can help generate some income.