Key Takeaways
- A reverse mortgage doesn’t automatically reduce your Age Pension, because your principal home stays exempt from the assets test regardless of how much you borrow against it.
- What matters is what you do with the money: cash left in the bank is deemed and assessable, but funds spent on your home, living costs, or left undrawn generally aren’t.
- Gifting has strict limits ($10,000 a year, $30,000 over five years) regardless of where the money came from, and excess amounts stay assessable for five years.
- How you draw the funds, lump sum, regular payments, or line of credit, affects both your pension position and how fast interest compounds.
If you’re a homeowner nearing or already in retirement, your house is probably your biggest asset and, quite possibly, your biggest source of untapped cashflow. With cost-of-living pressures still biting and many retirees finding the Age Pension alone doesn’t stretch as far as it used to, more people are asking whether a reverse mortgage could help fund renovations, top up day-to-day expenses, or give the kids a hand with a house deposit, without putting their pension at risk.
It’s a fair question, and an important one, because getting it wrong can be expensive. The short answer is that taking out a reverse mortgage does not automatically reduce your Age Pension. What actually matters to Centrelink is what you do with the money once you’ve drawn it. Leave it sitting in the bank, spend it on the house, buy a car, or gift it to a family member, and you can end up with very different outcomes.
This article walks you through exactly how a reverse mortgage interacts with the Age Pension means tests, where the common misunderstandings creep in, and how to think through your own drawdown strategy before you commit to anything. We’ll use real scenarios rather than just theory, because the practical impact is where most of the confusion lives.
How Centrelink actually assesses your Age Pension
Before we can talk about reverse mortgages specifically, it helps to understand how your Age Pension rate is calculated in the first place. Services Australia doesn’t use one test, it uses two, and whichever one produces the lower pension amount is the one that applies to you.
The income test
This looks at money you receive, including wages, income from investments, and deemed income from financial assets (more on deeming shortly). It doesn’t automatically capture a lump sum you’ve borrowed, but what that lump sum turns into afterwards can matter a great deal.
The assets test
This looks at what you own. Most personal assets are counted, but there’s one major exception that’s central to this whole topic.
The principal home exemption
The home you live in is generally exempt from the Age Pension assets test, regardless of how much it’s worth. This is precisely why a reverse mortgage doesn’t automatically cause a problem. You’re borrowing against an exempt asset. The complication only arises once that home equity is converted into cash or something else that Centrelink does count.
Deeming and financial assets
Financial assets such as savings, term deposits and shares are assessed under deeming rules, which assume you’re earning a certain rate of return whether you actually are or not. As at July 2026, the deeming rates are 1.25 per cent and 3.25 per cent, depending on the amount of financial assets you hold and your relationship status. This is one of the areas where borrowers get caught out, because deemed income applies whether the cash is sitting idle in an account or actively invested.
Does reverse mortgage money count as income?
This is usually the first question people ask, and it’s an important distinction to get right. A reverse mortgage is a loan, not income. You’re not earning it, you’re borrowing it against your own home equity, and it eventually needs to be repaid (typically when you sell the home, move into aged care, or pass away).
Because it’s a loan rather than earnings, it isn’t taxed and it isn’t treated as ordinary income the way a wage or a pension payment would be. However, that doesn’t mean it’s invisible to Centrelink. Once you draw the money and it becomes cash in your bank account, or you use it to buy something, it can become an assessable financial asset or non-financial asset depending on what happens next. The loan itself isn’t the trigger. What you do with the proceeds is.
Following the money: how the use of your funds affects your pension
This is the part that most explanations skip over too quickly, and it’s the section worth reading carefully if you’re weighing up a reverse mortgage. Think of it as a simple chain: your home equity, which is exempt, converts into cash, which generally isn’t, and then that cash converts into something else depending on your choices.
Here’s how different uses of the money commonly play out under the means tests.
| Use of funds | Likely Centrelink treatment |
| Left sitting in your bank account | Usually becomes a financial asset subject to deeming |
| Spent renovating your principal home | Generally different, because the home itself remains exempt |
| Used to buy a car | The car becomes an assessable non-financial asset |
| Used to buy shares or managed funds | Becomes an assessable financial asset, subject to deeming |
| Used to buy an investment property | Assessable asset, with possible income and rental implications |
| Spent on everyday living expenses or travel | Money is consumed, so there’s typically no lingering asset to assess |
| Gifted to family | Gifting and deprivation rules may apply |
| Left undrawn in a line of credit facility | Generally not counted, because you haven’t actually received it yet |
The undrawn line of credit point is worth highlighting on its own, because it’s one of the more useful structural features of a reverse mortgage. If your lender approves you for, say, $150,000 but you only draw $20,000 when you need it, Centrelink is typically only concerned with what you’ve actually received and how you’ve used it, not the full amount you’re theoretically entitled to access.
Lump sum, regular drawdowns, or line of credit
How you structure your reverse mortgage drawdowns has real consequences, both for your pension position and for how quickly interest compounds on the loan. This is genuinely one of the more important decisions in the whole process.
Taking a lump sum
A single lump sum gives you certainty and can be useful for a defined purpose like a major renovation or clearing an existing debt. The trade-off is that if you don’t spend it all straight away, the unused portion sitting in your account can immediately become an assessable, deemed financial asset. It also starts accruing interest on the full amount from day one, which is where compounding starts working against you.
Taking regular payments
Drawing smaller, regular amounts closer to when you actually need them keeps your cash balance lower, which generally means less exposure to the assets test and less interest accruing over time. It won’t suit every situation, particularly if you have a specific lump-sum need like a car or renovation, but for ongoing living costs it’s often the more considered approach.
Keeping funds in an undrawn line of credit
This gives you the flexibility of knowing funds are available without drawing them until required. As covered above, undrawn amounts generally aren’t assessed, and you’re not paying interest on money you haven’t touched. For many retirees, a hybrid approach, drawing a modest amount for an immediate purpose and leaving the rest available as a line of credit, offers the best balance between flexibility and pension protection.
Real borrower scenarios
Reading about assets tests and deeming in the abstract only gets you so far. Here’s how the same $80,000 drawdown can lead to quite different outcomes depending on what it’s used for.
Scenario one: renovating the family home
A retired couple draws $80,000 progressively over several months to replace their bathroom and repaint the house. Because the money moves from cash into improvements on their exempt principal home, they don’t end up with a new assessable asset sitting on Centrelink’s radar. The home was already exempt, and it remains exempt after the work is done.
Scenario two: leaving the money in savings
Another retiree draws the same $80,000 as a lump sum but only spends $15,000 of it in the first year. The remaining $65,000 sitting in a savings account is treated as a financial asset and deemed to earn income, which could reduce their pension under the income test, and it also adds to their assessable assets. Drawing the full amount before it was actually needed has effectively created a Centrelink issue that wouldn’t have existed if the funds had stayed undrawn in the loan facility.
Scenario three: buying a car
A pensioner uses $35,000 of a reverse mortgage to buy a new car. The cash has now converted into a non-financial asset that counts under the assets test, generally at its market value, which will depreciate over time but still needs to be factored in at the time of assessment.
Scenario four: helping a child with a house deposit
A parent draws $50,000 to help their adult child buy a first home. This crosses into gifting and deprivation territory, which we cover in detail below, and it’s one of the most common reasons pensioners get an unexpected letter from Centrelink.
Current Age Pension thresholds you should know
Because these figures are reviewed periodically, it’s worth checking them against Services Australia directly before making decisions, but as a guide, from 1 July 2026 the full Age Pension asset-free areas for homeowners are $333,000 for a single person and $499,000 combined for a couple. The part-pension cut-off points for homeowners sit at $733,500 for a single person and $1,102,500 combined for a couple. Once your assessable assets exceed the free area, your pension reduces progressively until it phases out entirely at the cut-off point.
These thresholds are exactly why the “where did the money go” question matters so much. A reverse mortgage that leaves your assessable assets below the relevant threshold may have little or no effect on your pension. One that pushes you over it can trigger a reduction, sometimes without the borrower realising it was coming.
Can you give reverse mortgage money to your children?
This comes up constantly, particularly from parents wanting to help adult children into the property market, and it’s worth addressing directly because the assumption that “it’s borrowed money, so Centrelink can’t touch it” is a genuinely risky one.
Centrelink’s gifting rules allow you to give away up to $10,000 in a single financial year, with a maximum of $30,000 over a rolling five-year period, without it affecting your pension. Amounts gifted above these limits are still counted as if you owned them, and deeming is applied to that amount, for five years from the date of the gift. This applies whether the money you’re gifting came from savings, an inheritance, or a reverse mortgage. The source of the funds doesn’t change the rule.
If helping family is part of your plan for the funds, it’s worth structuring the amount and timing carefully, ideally with guidance from Services Australia’s Financial Information Service, rather than assuming a workaround exists because the money is technically borrowed.
Reverse mortgage versus the Home Equity Access Scheme
These two products are often confused, and it’s an understandable mix-up because they work in broadly similar ways. Both let older Australians access equity in their home without selling it, both accrue interest over time, and both are typically repaid from the estate or on sale of the property.
The key difference is who’s lending the money. A reverse mortgage is offered by a private lender under commercial terms, while the Home Equity Access Scheme (HEAS) is a government loan administered by Services Australia, with its own eligibility rules, payment structure and interest rate. HEAS can provide fortnightly payments and, in some circumstances, limited lump-sum advances, and certain HEAS advance payments carry a 90-day exemption from the assets test that doesn’t automatically apply to private reverse mortgage products. If you’ve seen a blanket claim online that any reverse mortgage draw gets a 90-day pension exemption, it’s worth treating that with caution and checking directly with Services Australia, because that specific exemption relates to HEAS, not private lending.
Does the debt itself reduce your assessable assets?
It’s a reasonable assumption that if you owe $150,000 against your home, that debt should reduce your assessable assets by the same amount. For a reverse mortgage secured only against your principal home, that’s usually not how it works, because the home was already exempt from the assets test before you borrowed against it. The debt reduces the equity in an asset that wasn’t being counted in the first place, so it doesn’t create an offsetting reduction against your other assessable assets. This trips up plenty of retirees who expect the loan balance to work in their favour on both sides of the ledger.
Other risks worth weighing up before you apply
Pension impact is an important part of the decision, but it shouldn’t be the only consideration. A reverse mortgage is a long-term commitment with its own set of trade-offs.
- Compound interest can add up faster than expected, particularly with larger lump-sum draws taken early
- Your remaining home equity reduces over time, which can affect your options later in life, including funding aged care
- Reverse mortgages taken out from 18 September 2012 come with statutory negative equity protection, meaning you can’t end up owing more than your home is worth, but it’s still worth understanding how that protection works
- Your estate and what you’re able to leave to beneficiaries will be affected by the outstanding loan balance
- Moving out of the home, including into aged care, can trigger repayment of the loan
None of these are reasons to avoid a reverse mortgage outright, but they’re reasons to think through the full picture rather than focusing solely on the pension question.
How a broker can help you structure this properly
This is where working with someone who does this regularly tends to make a genuine difference. A broker can help you compare reverse mortgage products across different lenders, work through how much you actually need versus the maximum you’re eligible to borrow, and structure a drawdown approach, whether that’s a lump sum, regular payments, or a line of credit, that suits your specific goals while being mindful of your pension position. We can also talk you through realistic interest projections over five, ten or fifteen years, so you can see how your remaining equity is likely to track, and help you think through timing if part of your plan involves renovations, debt consolidation or supporting family. What we can’t do is provide formal Centrelink or financial advice, so for anything involving your specific pension entitlement, we’ll always recommend confirming the detail with Services Australia’s Financial Information Service or an appropriately qualified financial adviser alongside the lending conversation.
A reverse mortgage isn’t the only way to use property value or arrange finance later in life. Depending on your goals, it may be worth comparing equity release options if you want to access wealth tied up in your home, or exploring retirement home loans if you still need mortgage finance after 60. If the funds are intended for a major build or structural renovation rather than smaller home improvements, construction finance may also be worth considering because funds are generally released progressively as the work is completed.
A simple framework before you apply
If you’re weighing up whether a reverse mortgage is right for you, working through these questions in order tends to bring clarity fairly quickly.
- How much do you actually need, rather than the maximum you could borrow
- When do you need it, now or progressively over time
- What will the funds be used for
- Will any portion remain sitting in cash rather than being spent
- Could gifting or deprivation rules apply to any part of your plan
- What will this mean for your Age Pension under both the income and assets tests
- How quickly is interest likely to compound under your chosen drawdown structure
Frequently Asked Questions (FAQs)
1. Does taking out a reverse mortgage automatically reduce my Age Pension?
No, not automatically. A reverse mortgage borrows against your principal home, which is generally exempt from the assets test. The pension impact depends on what happens to the money after you draw it, not on the existence of the loan itself.
2. Does reverse mortgage money count as income for Centrelink?
It’s treated as a loan rather than ordinary income, so it isn’t taxed or counted as income in the way a wage would be. However, once the funds are drawn and sitting in your account, or converted into other assets, they can be assessed under the income or assets tests depending on how they’re held.
3. What happens if I leave reverse mortgage money in my bank account?
Cash sitting in your account is generally treated as a financial asset and is subject to deeming, meaning Centrelink assumes it’s earning a certain rate of income regardless of what it’s actually earning. This can affect your pension under the income test and adds to your assessable assets under the assets test.
4. Can I use a reverse mortgage for home renovations without affecting my pension?
Generally, yes, because the money is being converted back into your principal home, which remains exempt from the assets test. It’s still worth keeping records of how the funds were used, in case Centrelink asks for evidence.
5. Can I give reverse mortgage money to my children or grandchildren?
You can, but standard gifting rules apply regardless of where the money came from. You can gift up to $10,000 in a financial year, up to a maximum of $30,000 over five years, without it affecting your pension. Amounts above these limits are still counted as your asset, with deeming applied, for five years.
6. Is an undrawn reverse mortgage line of credit counted as an asset?
Generally not, because you haven’t received the funds yet. Only amounts you’ve actually drawn down are typically relevant to your pension assessment, which is one reason a line of credit structure can be a useful way to manage your Centrelink position.
7. What is the difference between a reverse mortgage and the Home Equity Access Scheme?
A reverse mortgage is offered by a private lender on commercial terms, while the Home Equity Access Scheme is a government loan administered by Services Australia with its own eligibility, payment and means-testing rules, including a specific 90-day exemption for certain advance payments that doesn’t automatically apply to private reverse mortgages.
The Bottom Line
A reverse mortgage doesn’t have to put your Age Pension at risk, but treating it as a “set and forget” decision can catch you out. The home you live in stays exempt, and it’s what you do with the money afterwards, whether it stays in cash, gets spent on the house, buys another asset, or is gifted to family, that determines whether your pension is affected. Thinking through your drawdown structure before you apply, and getting the timing and amounts right for your own circumstances, is what makes the real difference between a reverse mortgage that supports your retirement comfortably and one that creates an unexpected Centrelink headache down the track. If you’re weighing this up, it’s worth having a conversation about your specific situation before locking in a structure, so the numbers work for you on both sides of the ledger.
