Loan types
What is a reverse mortgage, and who does it actually suit?
A reverse mortgage lets an older homeowner borrow against the equity in their home without making regular repayments. The debt, and the interest that has accumulated on it, is repaid when the home is sold, or when the borrower moves out or dies.
Written by Gavin Harrigan, Managing Director
Broking since 2005, four-time Top 100 broker and a PLAN Australia Hall of Fame member.
Published
Key takeaways
The things worth rememberingNo repayments are required, so interest compounds and the balance grows over time
Loans from 18 September 2012 carry a no negative equity protection in law
You can stay in the home until you sell, move out or die
Rates are typically around 2 per cent above a standard variable owner occupier loan
A credit licensee must show you equity projections from ASIC's own calculator before assessing you
The real question is what equity remains for later needs, such as aged care
It is a genuine option for somebody who owns their home, has few other assets, and needs money now. It is also an expensive one, and the cost is easy to underestimate because nothing leaves your account each month.
This guide explains how they work, what the law protects you from, what the regulator found when it reviewed the market, and the questions worth asking before anybody signs anything.
How a reverse mortgage works
You borrow against the equity in your home and make no repayments. Interest is charged on the balance and added to it, so the debt grows rather than shrinks.
You keep living in the property and you remain the owner. The loan becomes repayable when you sell, move out permanently, or die, and it is usually repaid from the proceeds of the sale.
How much you can borrow depends on your age and the value of the home, with the proportion generally rising as you get older. Money can commonly be taken as a lump sum, as regular payments, as a line of credit, or as a combination.
The protection you have, which is real
Reverse mortgages entered into from 18 September 2012 carry a statutory no negative equity protection. You cannot end up owing more than your home is worth.
ASIC puts it plainly: under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out.
That protection is the reason a reverse mortgage is not the product it was a generation ago, and it is worth knowing before you read older advice about them.
What a lender has to show you first
This is the part almost nobody mentions, and it is the most useful thing on this page if you are considering one.
A credit licensee must use ASIC's reverse mortgage calculator to produce equity projections and show them to you before making an assessment about a reverse mortgage. That is a legal obligation under the National Credit Act, not a courtesy.
Three specific scenarios have to be shown, and they are prescribed rather than chosen by the lender.
| Scenario | What it shows | Assumed property growth |
|---|---|---|
| One | How much the debt increases over time and the effect on your equity | 3 per cent a year |
| Two | What happens to your equity if the home's value does not rise at all | 0 per cent a year |
| Three | What happens to your equity if interest rates are 2 per cent higher | 3 per cent a year |
What the regulator found when it looked
ASIC reviewed the reverse mortgage market in 2018, covering data on 17,000 loans, 111 consumer loan files, lender policies and complaints, plus interviews with 30 borrowers.
The headline finding was not that the product was bad. It was that borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how it could affect their ability to afford future needs.
For nearly all of the loan files reviewed, the borrower's long term needs or financial objectives were not adequately documented. The regulator's summary was that lenders and brokers need to have a genuine conversation about possible future needs rather than a set of tick boxes on a form.
Who a reverse mortgage tends to suit
The honest version of this section is that it depends on what the money is for and what has to happen afterwards.
It tends to be considered by someone who owns their home outright, has limited other assets, wants to stay put, and needs money for a purpose that improves the years they are in now.
| Situation | Why it can work | What to weigh against it |
|---|---|---|
| A defined, one-off need | A modest lump sum has years to compound before the house is sold | The balance still grows the whole time |
| Home modifications to stay at home longer | Directly extends how long the home remains suitable | Compare against the cost of moving instead |
| Supplementing income in retirement | Turns an illiquid asset into something usable | Regular draws compound for longer than a late lump sum |
| No intention of leaving the home to anybody | The equity is there to be used | Aged care costs may still need to come from it |
| Needing money for a long-term shortfall | Rarely the right tool | The debt grows exactly while the shortfall persists |
Notice the pattern. It works best where the borrowing is bounded and the purpose is specific, and worst as a way of covering an ongoing gap that has no end date.
What to consider before you go anywhere near one
These are the questions worth answering first, and most of them are about later rather than now.
- What is the money actually for, and is there an amount that is enough
- What might you need equity for later, including aged care, and will it still be there
- What do the three ASIC scenarios show, particularly the one where the house does not rise
- Have you compared it against downsizing, which frees equity without a growing debt
- Have you checked whether the Home Equity Access Scheme run by Services Australia fits better
- How would it affect any Age Pension or other entitlements, which is a Centrelink question
- Have your family been told, because it changes what is left and surprises cause disputes
- Have you had independent legal and financial advice, separate from whoever is arranging it
The Home Equity Access Scheme is worth a specific mention because it is government run, it is a genuine alternative for some people, and it is easy to reach one of these products without ever being told the other exists.
Where we fit, and where we do not
We have written this as an explainer rather than an offer. It is here because people search for what a reverse mortgage is and deserve a straight answer, not because it is the product we are steering anybody towards.
If you want to talk through whether it suits your circumstances, or what the alternatives look like, we are happy to have that conversation and to tell you honestly if the answer is somebody else.
Where it is worth comparing against ordinary lending, our guide at The types of home loan, compared covers the loan types, and Refinancing a home loan covers restructuring an existing loan, which for some people is the question underneath the one they asked.
About the author
Gavin Harrigan
Managing Director
Gavin has been broking since 2005 and has made the Top 100 brokers list four times. He is a PLAN Australia Hall of Fame member, which is awarded for sustained excellence rather than a single good year.
Qualifications
- Bachelor of Commerce, Applied Finance and Commercial Law, Curtin University
- Diploma of Finance and Mortgage Broking Management, AAMC Training Group
- PLAN Australia Hall of Fame member
- Elite Broker status
- Top 100 Brokers, four times
Accredited across the 40+ lenders on the MoneyQuest panel and working under Australian Credit Licence 389083.
Read Gavin’s full profileQuestions people ask about this
What is a reverse mortgage?
It is a loan that lets an older homeowner borrow against the equity in their home without making repayments. Interest is added to the balance, so the debt grows over time. It is repaid when the home is sold, or when the borrower moves out permanently or dies, usually from the sale proceeds.
Can I end up owing more than my house is worth?
Not on a reverse mortgage entered into from 18 September 2012. Those loans carry a statutory no negative equity protection, so you can never owe more than the property is worth. ASIC also confirms you can remain in your home until you pass away or decide to move out.
How much does a reverse mortgage cost?
More than a standard home loan. ASIC notes rates are typically around 2 per cent higher than a standard variable owner occupier loan, and because no repayments are required the interest compounds on itself. The total cost depends on how much you borrow, how long, and what rates do.
Do I have to make any repayments?
No, that is the defining feature. Some lenders allow voluntary repayments if you want to slow the growth of the balance, but none are required. The debt and the accumulated interest are repaid at the end, when the property is sold or you move out or die.
What should a lender show me before I take one out?
Equity projections generated with ASIC's reverse mortgage calculator, covering three prescribed scenarios: how the debt grows over time, what happens if the home's value does not rise at all, and what happens if interest rates are 2 per cent higher. That is a legal obligation on the credit licensee.
Will it affect my Age Pension?
It can, and that is a Centrelink question rather than a lender one. How the money is received and what you do with it both matter. Services Australia has Financial Information Service officers who provide this information free, and it is worth speaking to them before you commit to anything.
What are the alternatives to a reverse mortgage?
Downsizing frees equity without a growing debt. The Home Equity Access Scheme run by Services Australia is a government alternative worth checking. Depending on circumstances, restructuring an existing loan or drawing on other assets may suit better. Independent advice is the way to compare them properly.
What happens to my family's inheritance?
Less of it, and possibly none. The debt plus accumulated interest is repaid from the property, and the no negative equity protection caps that at the value of the home rather than preserving anything above it. Telling your family in advance avoids the dispute that otherwise arrives later.
Related guides
Other guides worth your timeThese overlap more than they look like they do. Most people end up reading at least two.
The information on this page is general in nature and does not take into account your objectives, financial situation or needs. Any figures shown are estimates only. Lending is subject to approval, and to the lender's terms, conditions, fees and charges. Consider whether the information is appropriate for you before acting on it.
Quantum Finance Australia Pty Ltd ABN 63 115 967 818 as trustee for the Gavin Harrigan Family Trust trading as Quantum Finance Australia is authorised under Australian Credit Licence Number 389083.
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