Reverse mortgages and home reversion schemes

Using the equity in your home

If you're over 55, own your own home and need to access money, releasing some of the equity in your home may be an option. However, there can be long-term financial risks with a reverse mortgage or a home reversion scheme.

Here we explain what home equity release products are and how to decide whether this is right for you.

Is home equity release right for you?

Signing up to a home equity release product is a big decision with long-term implications. Before you sign up for a reverse mortgage or a home reversion scheme, consider the following table. 

Home equity release may be suitable if you

Home equity release is not suitable if
  • want a small amount of money each year to supplement your income and you can afford to do this for many years.
  • need a lump sum for home maintenance or renovations so you can stay in your home.
  • want money for a critical need e.g. medical treatment.
  • need a loan to secure aged care accommodation until you sell your home.
  • you are spending much more money each year than you can afford for the long term.
  • you want to give or lend money to your family.
  • the debt could eat into money you need in the future for medical bills, aged care or home maintenance.
  • you are doing it to invest, because you would be risking your entire home - not just the portion you are investing.

If you only need small regular amounts to top up payments such as your Age Pension, bereavement allowance, veteran's pension, carer's payments, disability support pension, or widow B or wife pension, check out the Pension Loans Scheme offered by the Department of Human Services and the Department of Veterans' Affairs. The interest rate is slightly lower than commercial equity release products. 

Reverse mortgages

What is a reverse mortgage?

A reverse mortgage is a type of loan that allows you to borrow money using the equity in your home as security. The loan amount you borrow can be taken as a lump sum, a regular income stream, a line of credit or a combination of these.

Interest is charged like any other loan, except you don't have to make repayments while you live in your home - the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want. 

You must repay the loan in full (including interest and fees) when you sell or move out of your home or, in most cases, if you move into aged care, or die. 

How much will a reverse mortgage cost? 

The cost of the loan depends on the interest rate and fees. The main issue is that as the interest compounds, the debt will grow rapidly. 

Figure 1 shows how compound interest could make a debt grow by almost $158,000 in interest, if the interest rate rises by 2%.

Figure 1: Effect of compound interest on a reverse mortgage loan

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Assumptions: $118,627 loan at age 65, no regular withdrawals. Interest rates increase from 6.3% to 8.3%, calculated and charged monthly. House valued at $632,598.

Some reverse mortgage products also allow you to protect a portion of the value of the property. For example, you might want to ensure that you have an amount left in case you need to pay for residential aged care. Use our reverse mortgage calculator to explore your options.

Important: Negative equity protection

On 18 September 2012, the Government introduced statutory 'negative equity protection' on all new reverse mortgage contracts. This means you cannot end up owing the lender more than your home is worth (the market value or equity). 

If you entered into a reverse mortgage before 18 September 2012, check your contract to see if you are protected in circumstances where your loan balance ends up being more than the value of your property.

Home reversion schemes

What is a home reversion scheme?

A home reversion scheme allows you to sell a fixed proportion of the future value of your home while you still live there. The remaining proportion of your home equity is protected and, unlike a reverse mortgage, it is not a loan.

Lenders will only pay you a 'discounted' lump sum for the proportion of your home equity, and that amount will largely depend on your age and life expectancy. For example, if your home is valued at $200,000 and you sell 50% of the future value of your home, a provider may only offer you a discounted sum of between $35,000-$65,000 for that proportion, even though 50% of the current value of your home is $100,000.

When your house is sold, you must pay the proportion of the proceeds back to the scheme provider. So, if 20 years down the track your house sells for $400,000, the provider would get 50% of this amount: $200,000.

How much will a home reversion scheme cost?

As a home reversion scheme is not a loan but a payment for a proportion of the future value of your home, you will not pay interest on the amount you receive.

The scheme will end up costing you the difference between what you receive for a proportion of your home now, and what that proportion is worth when you sell your house in the future. So, the more your property grows in value, the more you will end up paying the provider when your home is sold.

Important: Income stream for capital growth

A company may offer you an income stream or lump sum in return for the capital growth on your home (a property option). While the cashflow may look attractive now, the income you receive will probably be much lower than the capital appreciation of your home that you are forgoing.

These types of offers may not be covered by credit or financial services laws, meaning you may not have access to important consumer protections such as free external dispute resolution.

Risks of reverse mortgages and home reversion schemes

Home equity release products are quite complex so consider getting legal or financial advice before you decide to take this step. Your decision could affect your partner, family and anyone you live with, so make sure you understand what you're signing up for.

Risks of a reverse mortgage

Risks of a home reversion scheme
  • Interest rates and ongoing fees are generally higher than the average home loan.
  • Your debt will increase as interest rates rise on your loan.
  • The effect of compound interest means your debt can increase quickly as the interest compounds over the term of the loan.
  • If the value of your home does not rise, or it falls in value, you will have less money for your future needs, like aged care or medical treatment.
  • If you have a fixed interest rate loan, the costs to break your agreement can be very high.
  • If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you move out or die (in some circumstances).
  • Home reversion schemes can be difficult to understand.
  • You don't know what the actual cost is.
  • Your circumstances and financial views might change as you age; if you use too much money now, you may not have enough later.

Things to consider before you sign up for home equity release

Before you sign up to a reverse mortgage or home reversion scheme, check and consider the following:

Smart tip

Accessing your home equity may affect your eligibility for the Age Pension, so talk this through with someone from the Department of Human Services' Financial Information Service

  • Special terms and conditions - Are there any restrictions on what you can do with the money? What happens if you sell your home early or if you sell it for more than expected? 
  • Life changes - Do you need the provider's permission to sell, lease, vacate or renovate your home or have someone move in with you? What happens if you or your spouse were to die, or if you move? 
  • If things go wrong - Ask the lender what external dispute resolution scheme they belong to, so you know where to go if you have a problem. Find out how to complain if you need to resolve a dispute. 
  • Independent valuation - Arrange an independent valuation of your home. If the provider's valuation is too conservative, you will give away thousands of dollars of home equity in a home reversion scheme. 
  • Independent legal advice - Ask your legal adviser to explain the fine print of the contract so you understand the consequences of breaching any terms and conditions. Consider getting financial advice before you commit to a home equity release product.
  • Future expenses - Start planning now for extra costs you could incur as you get older, like medical expenses and aged care, so that you will have enough money left to cover them.

Additional things to consider before you get a reverse mortgage

As well as the above considerations that apply to both types of home equity release products, you should also understand the following issues before you sign up for a reverse mortgage:

  • Information sheet - Obtain an information sheet from your provider so you can understand how the reverse mortgage works and how costs are calculated.
  • Projections - Your credit provider must go through reverse mortgage calculations with you, using MoneySmart's reverse mortgage calculator to show the effect a reverse mortgage will have on the equity in your home over time, and the impact of interest rates and house price movements. They must give you a copy of these projections to take away with you, so make sure you understand what you are reading.
  • Security - Check if the lender will accept a holiday home or investment property as security so the family home can remain debt-free. Also, ask if there are special arrangements if your home is already mortgaged.
  • Cooling-off period - Find out if there is one so you can pull out if you change your mind.
  • How to take the loan - Will you take the loan a lump sum, regular income stream, line of credit or combination of these? Regular income stream payments or a line of credit are less costly than a lump sum.

Equity release products should not be entered into lightly. Consider your future needs and speak to your family and obtain financial and legal advice before proceeding.

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Last updated: 21 May 2019