Reverse Mortgages

A reverse mortgage lets you borrow against the equity in your home without making regular repayments. The interest is added to the balance and the loan is repaid when the home is sold – usually when you move into aged care or after you pass away. Most lenders require the youngest borrower to be at least 60, and how much you can draw is set by your age and the value of the property.

It is a product that suits some people very well and is wrong for others. We would rather say so early than arrange something you regret, so the first conversation is about whether you need one at all.

The protections that apply by law

Reverse mortgages are regulated credit, and since 18 September 2012 every one written in Australia carries statutory negative equity protection. You cannot be left owing more than the net proceeds of selling the home, even if the debt has grown past its value. That protection is in the law, not a feature one lender offers and another does not.

Lenders are also required to show you projections of what the loan does to the equity in your home over time, using assumptions set by ASIC. Read those projections closely – they are the most important page in the pack.

What it actually costs

There are no monthly repayments, but the interest compounds. A balance that is not being paid down roughly doubles over the space of about twelve years at a rate near 9 per cent, and faster if you keep drawing. The trade-off is straightforward: you release money now and the estate receives less later. That is a reasonable trade for many households – it is simply one the family should make with its eyes open.

ASIC’s Moneysmart site publishes a reverse mortgage calculator that projects the balance and remaining equity year by year. We will run it with you before anything is signed.

The alternatives we raise first

• The Home Equity Access Scheme. Run by Services Australia, it lends against your home at a government-set rate that is usually well below a commercial reverse mortgage. For someone who needs a modest regular top-up rather than a lump sum, it is often the better answer and we will say so.
• Downsizing. Selling and buying something smaller releases equity outright with no compounding debt. It costs you stamp duty, agent fees and a move – but for some households the arithmetic still wins.
• A standard loan. If there is still income to service repayments, an ordinary home loan is almost always cheaper than a reverse mortgage.
• Doing nothing yet. Drawing equity at 63 rather than 73 can cost the estate a great deal. If the need is not immediate, waiting is a strategy.

A worked example

An illustration of the arithmetic, not a specific client. A couple aged 70 own a home worth $900,000 with no mortgage and draw $150,000 to renovate and clear a small debt. At an indicative 9.0 per cent compounding with no repayments, the balance is roughly $231,000 after 5 years, $355,000 after 10 and $546,000 after 15. If the home grows at 3 per cent a year it is worth about $1.4m at the 15-year mark, so the remaining equity is roughly $854,000. Change the growth rate to 1 per cent and that equity falls to about $500,000. The two assumptions that matter most are the interest rate and the growth rate, and neither is knowable in advance – which is why we model a pessimistic case as well as a likely one.

How we handle these

We ask that an adult child or another person you trust sits in on the conversation, and we will not proceed without you having obtained independent legal advice – most lenders require it in any case. We will also ask you to speak to a financial adviser or Services Australia about whether drawing the money affects your pension or any later aged-care assessment, because that depends on what you do with the funds and it is not something a credit licence covers us to advise on.

If after all that a reverse mortgage is still the right tool, we will arrange it properly. If it is not, we will tell you.