Understanding reverse mortgages
Last updated: 13 November 2024 | Estimated read time: 5 Minutes
A reverse mortgage allows homeowners over 60 to borrow money using the equity in their home as security. Learn more about how it works and what it could mean for you.
What is a reverse mortgage?
A reverse mortgage is a type of loan designed for homeowners over 60. It allows you to use the equity in your home to access additional funds just in case you need them for things like medical bills or home renovations. The extra cash can come in a lump sum, a regular income stream, a line of credit, or a combination of these options.
It’s important to remember that a reverse mortgage taps into a significant wealth source - your home. For most people, it’s their biggest asset and can help pay for things you need later in life, like aged care. This is why it’s important to consider whether this type of loan is the best option for you, your family, and your financial situation. It’s important to speak to a trusted and licenced broker, financial or tax advisor to understand the full impact of a reverse mortgage on your current and future financial circumstances.
How does a reverse mortgage work?
As an older Australian, a reverse mortgage may be an option because you don’t have to sell your house to access money. You can continue living in your home without having to make repayments to your lender as long as you live there. However, once the property is sold, the reverse mortgage loan (and interest) must be fully repaid.
While you’re not repaying the loan while you still own the home, interest is compounding during this period. So, when it comes time to sell, you (or your estate) will repay the interest on top of the loan balance borrowed.
While you’re not repaying the loan while you still own the home, interest is compounding during this period. So, when it comes time to sell, you (or your estate) will repay the interest on top of the loan balance borrowed.
Who is eligible for a reverse mortgage?
For most lenders, to be eligible for a reverse mortgage you must either own your home outright or have a low mortgage balance. The youngest borrower also has to be at least 60 years old. Some lenders also have criteria around the location of the home and a minimum property value.
How do reverse mortgages differ from home equity loans or other lines of credit?
Home equity loans or line of credit loans are a different way to access the equity in your home. They differ from a reverse mortgage because:
- The loan amount can be up to 80-90% of the property's value minus any existing mortgage.
- There are regular repayments, and the loan balance decreases over time.
- They are available to homeowners of any age, not just those over 60.
Home equity loans or lines of credit are sometimes described interchangeably, but the differences in how the loan is set up can impact your financial situation.
A standard home equity loan delivers the funds as a lump sum, with a line of credit you have the flexibility to draw funds as needed. So, you either pay interest on the full amount or only on the amount you’ve taken out. With a line of credit, the funds also become available to use again, once they’ve been repaid. It’s best to speak to your financial or legal advisor to decide which option best suits your current and future financial position.
Does Pepper Money offer reverse mortgages?
Many lenders currently offer this type of loan in Australia, Pepper Money is not currently one of them.
We do have other options for older Australians looking for a cash boost, like a personal loan.
What others are asking about reverse mortgages
You must be over 60 and an Australian homeowner. Some lenders may also have criteria around minimum property value and location.
The amount you can borrow increases as you age. At age 60 you can borrow around 15-20% of your home’s value, and every year you can access 1% more.
Reverse mortgage rates are typically higher than standard home loan rates, and they can be either fixed or variable. Money Smart's reverse mortgage calculator^ can be used to estimate what a reverse mortgage could cost over different time periods
No. There are no monthly repayments on a reverse mortgage. However, the full balance plus interest must be paid when the home is sold.
Depending on what your lender is offering, it’s your choice whether you get a lump sum or regular payments with a reverse mortgage.
Yes, you (and the youngest property owner if the home is co-owned) must be over 60 years old to be eligible for a reverse mortgage.
Reverse mortgages are highly regulated, so the application and compliance process can take around 4-6 weeks, but it may be longer. Speak to your lender about their process and timelines.
- Speak to a licenced broker or lender about your circumstances and eligibility for a reverse mortgage.
- Fill out application forms and gather required documents. Your lender or broker will likely schedule a meeting to go through this with you.
- Lodge your application and clarify any extra details with the lender. If going through a broker, they will assist you with this.
- Wait for a compliance call from the lender. They will discuss your understanding of the loan and how it is eventually repaid.
- Your lender will conduct a property valuation, similar to any home loan.
- If everything meets the lender’ criteria, you’ll receive approval and a loan offer, including the interest rate which will affect the final repayment.
- Take your loan documents to your solicitor to sign. They will review the process with you and send the completed documents to the lender.
- On settlement, the lender’s lawyers will arrange the registration of mortgage and payout of any required amounts. Then you can access your reverse mortgage funds as set out in the loan terms.
It can, depending what you spend the money on. If you spend the money on what Centrelink defines as an asset (like a car or boat) and that makes you exceed the cost limit, it could reduce your pension.
If you spend the money on a non-assessable asset such as a holiday or renovations on your home, it is not assessed under the assets test.
You can ask the Services Australia Financial Information Service how a reverse mortgage could affect your pension or other government benefits.
Contributor | Barry Saoud, General Manager, Mortgages and Commercial Lending
Barry joined Pepper Money in July 2021 as General Manager, Mortgages and Commercial Lending. He is responsible for the strategic direction and operating performance across product, credit, and settlements for mortgages, commercial loans, personal loans, and direct sales. Read more.
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