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Reverse mortgage and home equity release

How to decide if a reverse mortgage or home reversion is right for you

Page reading time: 6 minutes

If you're age 60 or over, own your home and need to access money, 'home equity release' may be an option.

There is risk involved and a long-term financial impact, so weigh up the pros and cons first. Get independent financial or legal advice before you go ahead.

How home equity release works

'Equity' is the value of your home, less any money you owe on it (on your mortgage).

'Home equity release' lets you access some of your equity, while you continue to live in your home. For example, you may want money for home renovations, medical expenses or to help with living costs.

There are two types of equity release:

The amount of money you can get depends on:

Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you're signing up for.

Reverse mortgage

A reverse mortgage allows you to borrow money using the equity in your home as security.

If you're age 60, the most you can borrow is likely to be 15–20% of the value of your home. As a guide, add 1% for each year over 60. So, at 65, the most you can borrow will be about 20–25%. The minimum you can borrow varies, but is typically about $10,000.

Depending on your age, you can take the amount you borrow as a:

How a reverse mortgage works

You stay in your home and don't have to make repayments while living there. Interest charged on the loan compounds over time, so it gets bigger and adds to the amount you borrow.

You repay the loan in full, including interest and fees, when you sell or move out of your home.

You may be able to make voluntary repayments earlier, if you wish. You may also be able to protect a portion of your home equity from being eroded by the loan. For example, to ensure you have enough money left to pay for aged care.

What a reverse mortgage costs

The cost of the loan depends on:

A lender will go through reverse mortgage projections with you, showing the impact on your equity over time. They will give you a copy of this to take away, so take your time to digest it. Ask questions if there's anything you're not sure about.

Pros and cons of a reverse mortgage

Pros

Cons

Negative equity protection

Reverse mortgages taken out from 18 September 2012 have negative equity protection. This means you can't end up owing the lender more than your home is worth (market value or equity).

If you took out a reverse mortgage before this date, check your contract. If it doesn't include negative equity protection, talk to your lender or get independent advice on what to do.

Home reversion

Home reversion allows you to sell a proportion (a 'share' or 'transfer') of the future value of your home while you live there. You get a lump sum, and keep the remaining proportion of your home equity.

How home reversion works

The home reversion provider pays you a reduced ('discounted') amount for the share you sell. Depending on your age, this may be 25% or more of the current value of the share.

For example, suppose your home is currently worth $400,000 and you sell a 25% ($100,000) share of the future value. The provider may only offer you $25,000 to $40,000 to buy that share. When you sell your home, you pay the provider their share of the proceeds. So, if in 20 years time you sell your home for $800,000, the provider gets 25% of that amount: $200,000.

What home reversion costs

It's not a loan, so you don't pay interest. You pay a fee for the transaction and to get your home valued (as a guide, around $2,000). You may also have to pay other property transaction costs.

Home reversion costs you the difference between:

The more your home goes up in value, the more you'll pay the provider when you sell it.

Pros and cons of home reversion

Pros

Cons

Consider other options

If you need money, other options to consider include:

Get independent advice

Before making the decision to apply for a reverse mortgage or home reversion:

Couple talking over the newspaper, drinking tea.

Lorenzo and Sophia consider getting a reverse mortgage

Lorenzo is 70, Sophia is 65 and their home is worth $500,000. They want to renovate, but don't have enough savings.

They use the reverse mortgage calculator to explore what a loan might cost. Based on Sophia's age, the most they can borrow is 25% of the value of their home: $125,000. They want a lump sum to pay for the renovations.

They allow $1,000 for loan set-up fees and use the default interest rate of 7%.

In 15 years, if their property goes up in value 3% each year, it will be worth $779,984. They will own 54% of their home ($420,016), and owe the lender 46% ($358,967).

They're concerned this won't leave enough to pay for aged care or leave some money to their children. So they plan to get financial advice and borrow a smaller amount.