How does a reverse mortgage actually work?
A reverse mortgage can be a useful financial tool for older Australians who want to access the wealth tied up in their home without having to sell it. It allows homeowners, typically aged 60 or over, to borrow money using the equity in their home as security. But how does it actually work? Here’s a breakdown of the key features and what you should consider.
How the loan is received
With a reverse mortgage, you have flexible options for how you receive the funds. You can choose to access the money:
- as a lump sum to use as needed
- in regular income payments to supplement your pension or retirement savings
- through a line of credit that you draw from when required
- or a combination of the above, depending on your needs and the lender’s terms
This flexibility makes reverse mortgages attractive for retirees who want to stay in their home while freeing up cash for expenses like renovations, aged care, travel, or medical bills.
No regular repayments required
One of the defining features of a reverse mortgage is that you don’t need to make any regular repayments. Instead, interest is added to the loan balance over time. The loan, plus interest and any fees, is repaid when you sell the home, move into long-term care, or pass away.
It’s important to understand that this means your debt will grow over time. The longer you hold the reverse mortgage, the more interest accrues, which reduces the equity left in your home.
Interest rates and fees
Reverse mortgages typically come with higher interest rates than standard home loans. This is partly because they’re riskier for lenders and partly due to the nature of compound interest—where interest is charged on both the original loan and any interest that has already been added.
There may also be establishment fees, monthly account-keeping charges, and other associated costs. These should all be clearly outlined in the loan contract.
Protections and considerations
In Australia, reverse mortgages are regulated by consumer protection laws. Most lenders offer a “no negative equity guarantee,” meaning you won’t owe more than the value of your home when it’s sold—even if the loan balance exceeds the market value. This helps protect you and your estate from unexpected debt.
Still, a reverse mortgage will reduce your home equity, which may affect your eligibility for the Age Pension or the value of your estate for beneficiaries. It’s a good idea to speak with a financial adviser or seek legal advice before entering into one.
A reverse mortgage can be a helpful way to boost your income during retirement without selling your home. It offers flexibility and convenience, particularly if you have limited superannuation or other assets. However, because of the interest accumulation and impact on future finances, it’s essential to weigh the pros and cons carefully.
