Borrowing against your home
A reverse mortgage can help older Australians unlock the wealth
in their homes after retirement. However, there can be long-term
Here are some important things to consider before you take out a
reverse mortgage. You should also seek independent financial and
legal advice, and speak to your partner and family before you sign
up for this type of loan.
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
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 or move out of your home or, in most cases, if you
move into aged care, or die.
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.
The risks of a reverse
ASIC review of reverse mortgage lending in Australia found that
borrowers can struggle to recognise the long-term risks of their
By taking out a reverse mortgage, you could face financial
difficulty later in life, because:
- interest rates and ongoing fees are generally higher than the
average home loan
- your debt will increase as interest rates rise on your
- 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
- the loan may affect your pension eligibility
- if you have a fixed interest rate loan then the costs to break
your agreement can be very high.
Also keep in mind that 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).
Reverse mortgage income stream
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
So make sure you research all your options before
How much can you borrow with a
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
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
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.
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).
When the loan 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
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? Before you
sign up, your credit provider or credit assistance provider must go
through reverse mortgage calculations with you, in person, using
MoneySmart's reverse mortgage
These projections will:
- illustrate the effect a reverse mortgage may have on the equity
in your home over time
- show the impact of interest rates and house price
You must receive a printed copy of these projections to take
away with you. Make sure you understand how the projections work
and how changes in interest rates and house prices could change how
much equity you hold in your home. Be aware that the
projections are only an estimate and not a guarantee of how much
equity you will have if you take out the loan.
If there's anything you're not sure about, ask the
loan provider to explain it to you.
See how a reverse mortgage can affect the equity you have
in your home.
Reverse mortgage calculator
Find out what happens if you or your spouse were to die, 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,
find out if the other resident would 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.
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.
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 reverse
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 likely future expenses
Residential aged care upfront payments could cost at least
$380,000 per person. The average age most Australians go into aged
care is 84.
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 to 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 or a line of credit are less costly than a lump sum. Use
the reverse mortgage calculator
to work out the most cost-effective options.
Use the budget planner to work out your budget
before and after taking out a reverse mortgage.
Get independent legal and financial advice
Ask your legal adviser to explain the fine print of the contract
so you understand the consequences of breaching any terms and
Consider getting financial
advice before you commit to a reverse
A reverse mortgage can be useful to relieve
financial pressure or improve your lifestyle in retirement, but be
aware of the conditions of the loan and the choices
Last updated: 17 Sep 2018