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
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
- 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
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
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
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.
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
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
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
- 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
- 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:
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
- 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
Additional things to consider before you get a reverse
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
- 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.
Last updated: 06 Mar 2019