Borrowing against your home
A reverse mortgage is a complex product that can have a
significant impact on your finances and relationships, and your
quality of life in retirement.
Here are some important things to consider before you decide to
take out a reverse mortgage. You should also seek independent
financial and legal advice, and speak to your partner and family
before you jump in.
What is a reverse mortgage?
A reverse mortgage is a type of home loan that allows you to
borrow money using the equity in your home as security. The loan
can be taken as a lump sum, a regular income stream, a line of
credit or a combination of these options.
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
You must repay the loan in full (including interest and fees)
when you sell your home or die or, in most cases, if you move into
While no income is required to qualify, credit providers are
required by law to lend you money responsibly, so not everyone will
be able to obtain this type of loan.
- Interest rates are generally higher than average home
- The debt can rise quickly as the interest compounds over the
term of the loan - this is the effect of compound interest and is
something you need to be aware of before making any decisions
- The loan may affect your pension eligibility
- You may not have enough money left for aged care or other
- If you are the sole owner of the property and someone lives
with you, that person may not be able to stay when you die (in some
- If you fix your interest rate then the costs to break your
agreement can be very high
You may come across companies that offer you an income stream 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 are unlikely to be covered by credit or
financial services laws, meaning you will not have access to
important consumer protections such as free external dispute resolution.
So make sure you research all your options before
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).
When the reverse mortgage contract ends and your home is sold,
the lender will receive the proceeds of the sale and you cannot be
held liable for any debt in excess of this (except in certain
circumstances such as fraud or misrepresentation). Of course where
your home sells for more than the amount owed to the lender, you or
your estate will receive the extra funds.
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
How much can you borrow?
The older you are, the more you can borrow. Different lenders
may have different policies about how much they will let you
As a general guide, if you are 60 the maximum amount you
can borrow is likely to be 15-20% of the value of your home. You
can usually add 1% for each year older than 60. That means if you
are 70, the maximum amount you could borrow would be about
The minimum amount you can borrow may depend on the provider. It
could be as low as $10,000. Keep in mind that if you borrow the
maximum amount now, you may not have access to any more money
How much will a reverse mortgage
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
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 $200,000 left in case you need a bond for
an aged care hostel. Use our reverse mortgage calculator to explore
If you are borrowing money from a lender other than an
Authorised Deposit-taking Institution such as a bank, building
society or credit union, by law they must not charge more than 48%
interest including all fees and charges.
The graph below shows how compound interest could make a
debt grow from $50,000 to $232,000 over 15 years. Over 30 years it
could grow to over $1 million.
Note that, with statutory negative equity protection (for
contracts entered into after 18 September 2012), your debt cannot
grow to an amount greater than the market value of your home.
Questions to ask the
reverse mortgage provider
Before you sign on the dotted line, check the following.
Reverse mortgage information statement
Do you understand how a reverse mortgage works? Your credit
provider or credit assistance provider (such as a broker) must give
you a 'reverse mortgage information statement'.
The information statement includes:
- Details about how a reverse mortgage works
- How costs are calculated
- What to consider before taking out a reverse mortgage
- Useful contacts for more information
Reverse mortgage projections
What is the long term impact of a reverse mortgage? Your credit
provider or credit assistance provider must go through reverse
mortgage calculations with you, in person, before you take out a
reverse mortgage, using an approved reverse mortgage
These projections will:
- Illustrate the effect a reverse mortgage may have on the equity
in your home over time
- Show the potential impact of interest rates and house price
Make sure you understand these projections and how changes in
circumstances could change how much equity you hold in your home.
Take your time and ask the reverse mortgage provider to explain it
to you if there's anything you're not sure about.
When they go through the calculator with you they must give you
a printed copy of these projections to take with you. Be aware that
the projections are only an estimate and not a guarantee of how
much equity you will have should you take out the loan.
See how a reverse mortgage can effect the equity you have
in your home.
Reverse mortgage calculator
Check if the lender will accept a holiday home or investment
property as security so the family home can remain debt-free. Find
out if there are any special arrangements if your home is already
Special terms and conditions
Ask if there are any restrictions on what you can do with the
Check if there is a cooling-off
period so you can pull out if you change your mind.
Find out what happens if you or your spouse dies, or if you need
to transfer the loan to another house if you move. Check if you
need the lender's permission to sell, lease, vacate or renovate
your home or have someone move in with you.
If you are the homeowner and someone else is living with you,
the other resident may have to move out when the loan becomes
repayable. Some reverse mortgage contracts may protect the rights
of the other (non-title-holding) resident by allowing them to stay
in the home. If you want this option, make sure you discuss this
with your lender before taking out a reverse mortgage.
If things go wrong
Ask the lender what external dispute resolution scheme they
belong to. Then you will know where to go if you have a problem.
Find out how to
complain if you need to resolve a dispute.
Do your own research
Be proactive and do some homework before you sign up.
What is the impact on your social security?
Talk to the Department of Human Services' Financial Information
Service to check how a reverse mortgage would affect your
Think about your future and what costs there might be
You may not want to think too far into the future or about how
your health and living situation might change 10, 20 or even 30
years from now. But it is important that you start planning now for
the extra costs you could incur like medical expenses and aged
care, so that you will have enough money left to cover them.
How should you take the loan?
You can take the loan as a lump sum, regular income stream, line
of credit or a combination of these options. Regular income stream
payments may be less costly than a lump sum. Use our reverse mortgage calculator
to work out the most cost-effective options.
Get independent legal advice
Ask your legal adviser to explain the fine print of the reverse
mortgage contract so you understand the consequences of breaching
any terms and conditions.
A reverse mortgage can be useful to relieve
financial pressure or improve your lifestyle. Be aware of the
conditions of the loan and the choices available. Use a licensed
mortgage broker and seek financial advice before you commit to
a reverse mortgage.
Last updated: 30 Jan 2017