Lump sum access
Lump sum access compounds on the whole amount from day one, which is the most expensive way to take the money over a long period
Most Australians reach retirement with their wealth locked in the house they live in. The mortgage is gone, the home is worth more than it cost, and the money that would make retirement comfortable is sitting in the walls. Reverse mortgages for seniors and other equity release options unlock some of that value without your having to move out.
A reverse mortgage is the only common home loan where the balance grows instead of shrinking, and where the cost may be felt by your children rather than you. Used deliberately, for a defined purpose, it can support a comfortable retirement. Either way, understand it before signing.
It is worth knowing how equity release compares with ordinary home loan options first. Our Melbourne mortgage brokers can talk it through with you.
Thinking about releasing equity and not sure where to start? Call us on 1300 562 696. We would rather you asked early than late.
What Home Equity Release Means at Retirement Age
Equity is what your home is worth less anything still owing on it. Home equity release converts some of that equity into money you can use while you continue living in the property.
People use it for home modifications, medical or dental costs, clearing debt that eats into the pension, replacing a car, or topping up an income that no longer keeps pace.
Unlike an ordinary home loan, there is generally no requirement to make repayments while you live there. The interest is added to the balance instead, which makes the product accessible on a modest income and costly over decades.
How Much Equity You May Be Able to Release
The amount available is driven mainly by age and property value. As a general guide, Moneysmart indicates that at 60 the most you are likely to borrow is around 15 to 20 per cent of the value of your home, with roughly 1 per cent added for each year over 60, so about 20 to 25 per cent at 65. Minimums are commonly around $10,000. Where a couple applies, the younger borrower’s age drives the calculation.
How the Money Can Be Taken
The structure of the drawdown changes the total cost:
Regular payments
Regular payments supplement income, with interest compounding only on what has been drawn so far
Line of credit draws
Line of credit draws limit the balance to what you have actually used
Combination arrangements
Combination arrangements cover a one-off cost now with a smaller ongoing stream
How Compounding Interest Affects Your Equity
Because you make no repayments, the interest charged each period is added to the balance, and the next period’s interest is charged on that larger balance. Over five years the effect is modest. Over fifteen or twenty years it can consume a large share of the equity.
The Australian Securities and Investments Commission (ASIC) provides the Moneysmart reverse mortgage calculator for this purpose, and lenders and brokers must use it to show you equity projections before proceeding. Ask for a printed copy and read it away from the meeting.
How Loanworx Group Helps Seniors Weigh It Up
Loanworx Group does not sell one product, so the first job is working out whether equity release is the right tool at all, and saying so where it is not.
Where it is appropriate, a reverse mortgage broker can compare the lenders and structures, run the projections, and set the drawdown up so you are not paying compound interest on money you have not needed yet.
Where This Leaves You
Equity release is not something to be talked into or frightened out of. Once the projections are in front of you, the pension effect is confirmed and your family has heard it from you, it stops being a worry you carry and becomes a choice you have made. Whether the answer is a reverse mortgage, a government scheme, a smaller home or nothing at all, you will know why.
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The Main Ways to Release Equity
A reverse mortgage is the best known option, but it is not the only one, and it is frequently not the cheapest:
|
Option |
How It Generally Works |
Main Considerations |
|
Reverse mortgage |
You borrow against your home with no required repayments, and the loan is repaid when the home is sold or you leave permanently |
Rates are typically higher than standard home loans, and the balance grows as interest compounds. Loans since 18 September 2012 carry negative equity protection |
|
Home Equity Access Scheme |
You draw a fortnightly government loan from Services Australia or the Department of Veterans’ Affairs, with the option of a lump sum advance |
Age Pension age eligibility applies, and combined pension and loan payments are capped at 1.5 times the maximum fortnightly pension rate. Government pricing sits well below commercial reverse mortgage rates |
|
Home reversion |
You sell a share of the future value of your home for a lump sum now, keep the rest, and continue living there |
Providers pay a discounted amount for that share, so you give up more future value than you receive today. No interest applies |
|
Downsizing |
You sell and move to a smaller or less expensive home, releasing the difference as cash |
Selling, buying and moving costs are real, and the proceeds may affect pension entitlements |
|
Standard home loan or line of credit |
You borrow against the home in the ordinary way and make regular repayments |
Repayments must be affordable, but the cost is generally far lower than equity release |
Protections That Apply in Australia
Four protections apply to a regulated reverse mortgage:
01
Negative Equity Protection
Reverse mortgages taken out from 18 September 2012 carry negative equity protection. You cannot owe the lender more than your home is worth, and the lender must accept the sale proceeds in full settlement. If your loan predates that date, check the contract.
02
Compulsory Equity Projections
A credit licensee must show you equity projections generated with the ASIC calculator before assessing a reverse mortgage, and you are entitled to a printed copy and time to consider it.
03
Regulated Credit and Best Interests Duty
Reverse mortgages are regulated under national consumer credit law, and brokers arranging them must act in your best interests. Not every equity release arrangement carries the same protections.
04
Independent Advice
Many lenders require independent legal advice before signing, and some require financial advice. The decision is difficult to reverse.
Effects on Pension, Aged Care and Family
Releasing equity reaches beyond your own budget:
Age Pension and Means Testing
Money released from your home can change your position under the income and assets tests. The family home is generally exempt; the cash you draw out of it may not be. The Services Australia Financial Information Service (FIS) offers free, independent guidance, and it is worth using before the money arrives.
Aged Care Costs and Home Support
Equity release can fund support that keeps someone at home longer. It can also affect how aged care costs are assessed later, and it reduces the funds available for a residential care deposit. Some lenders let you protect a portion of your equity from the loan, so ask whether that feature is available.
Family, Estate and Inheritance
Adult children are sometimes surprised, and surprise is usually the source of the conflict, not the decision. You are entitled to spend your own equity. It is still worth having the conversation.
When Equity Release May Not Be the Right Tool
Situations that warrant particular caution include:
- Borrowing to invest, which puts your entire home at risk rather than just the amount invested
- Releasing a lump sum to gift to family, which can affect pension entitlements and cannot easily be undone
- Covering an ongoing shortfall with no plan for when the available equity runs out
- Leaving someone in the home who is not on the loan and may have no right to remain when it ends
- Signing while you feel pressured, rushed or unclear about the terms
Sometimes the answer is simpler than equity release. Checking your full pension and concession entitlements, or refinancing an existing loan where income allows, can produce a better result at a fraction of the cost.
Frequently Asked Questions (FAQs)
At what age can I get a reverse mortgage in Australia?
Most lenders set a minimum age of 60, and some set it higher. The amount available increases with age, and where a couple applies, the younger borrower’s age determines the limit.
Can I end up owing more than my house is worth?
Not on a reverse mortgage taken out from 18 September 2012, which carries negative equity protection. The lender must accept the sale proceeds as full settlement. Loans predating that date should be checked, as the protection may not apply.
Will a reverse mortgage affect my Age Pension?
It can. The home itself is generally exempt from the assets test, but the funds you release may be assessed once they are held as cash or an investment. The effect depends on the amount, how you hold it and what you do with it. The FIS can explain your position free of charge.
What happens to my children’s inheritance?
The loan and accumulated interest are repaid before the estate is distributed, so the inheritance is reduced by whatever the balance has grown to. How much remains depends on the amount drawn, the rate, the time elapsed and property values. Projections show the likely range, and it is worth sharing them with the family.
This information is general in nature and does not take into account your objectives, financial situation or needs. Reverse mortgages and equity release are complex, long-term decisions with consequences for your pension, your aged care position and your estate. Interest rates, fees, lender policies and government scheme rules can change. Before proceeding, obtain independent legal advice, consider financial advice, contact the FIS about the effect on your entitlements, and take the time to discuss the decision with your family.
Talk to a Reverse Mortgage Broker
Bring your questions, and your family if you would like them there. Call 1300 562 696 and we will run the projections and tell you straight whether equity release earns its place.
