By Jesse McPherson

If you’re a retired homeowner who’s feeling the pinch of everyday living, a reverse mortgage might be very tempting – and the right path to pursue. But you have to know the ins and outs. Jesse McPherson breaks down everything you need to know about reverse mortgages.

Reverse mortgages are rapidly growing in popularity, and it’s easy to see why. Right now, Australia has an ageing population that’s sitting on decent equity, while the rise in cost of living has strained cash flows.

For some people in this situation, the ability to tap into the equity in their home without having to leave it is very tempting. That’s precisely what a reverse mortgage offers.

But all forms of borrowing come with their upsides and downsides. Before heading down this path, you have to know what the risks are, what the consequences may be for your family, and you have to be very clear in your own mind what the funds will be used for.

To that end, here’s a crash course in reverse mortgages and how they might be of benefit to you. As always, if you have any further questions or are thinking about applying for a reverse mortgage, don’t hesitate to get in touch with the team at Kingsbridge Private.

What are the benefits of a reverse mortgage?

A reverse mortgage offers several advantages for retirees looking to boost their cash flow:

• Access to Equity Without Selling. This is the main benefit of a reverse mortgage. Many retirees have substantial equity locked in their homes, which they can now access for immediate financial needs without moving.
• No Ongoing Repayments. With a reverse mortgage, no repayments are due until the property is sold. This can significantly reduce financial strain during retirement.
• Flexible Payout Options. Borrowers can choose to receive funds in ways that best suit their needs—whether it’s a lump sum for a one-time expense, regular payments to supplement income, or a line of credit for ongoing expenses.

What are reverse mortgages used for?

A reverse mortgage can be used in a variety of ways. Here’s a sample:

• Supplementing Retirement Income: Many retirees use a reverse mortgage to cover everyday expenses and maintain their lifestyle, especially if their superannuation or pension falls short.
• Home Modifications and Maintenance: As people age, making homes safer and more accessible can be essential. Reverse mortgage funds can cover the cost of renovations, like installing ramps, grab bars, or even updating kitchens and bathrooms.
• Medical and Health Care Expenses: Medical bills, prescription costs, and in-home care can add up quickly. Reverse mortgage funds can help cover these health-related expenses, providing peace of mind during retirement.
• Aged Care: Payment of accommodation deposits and daily payments when moving into Aged Care can be substantial and a reverse mortgage can help remove the stress of how these will be managed.
• Assisting Family Members: Some retirees choose to help their children or grandchildren with significant life events, like paying for education, a wedding or a home deposit. A reverse mortgage can provide the funds to support loved ones without drawing from cash reserves.
• Travel and Leisure: For those looking to enjoy their retirement years by traveling, a reverse mortgage can provide extra cash to fund holidays or leisure activities that may have been otherwise out of reach.
• Unexpected Costs or Emergency Funds: Life’s surprises—whether major home repairs or unexpected medical costs—can be managed more easily with access to reverse mortgage funds, creating a financial buffer.

As you can see, a reverse mortgage can be used for many different purposes. The most important thing is that you are very clear on what you want to do with the money.

What is a Reverse Mortgage?

A reverse mortgage is a unique type of loan available to older Australians that allows them to convert part of their home’s equity into cash, all while retaining ownership and the right to live in the home. Unlike traditional loans, reverse mortgages don’t require monthly repayments. Instead, the loan balance, including accumulated interest, is repaid when the house is sold – typically after the borrower passes away, moves into long-term care or decides to sell.

Key Features

No Monthly Payments: Borrowers are not required to make monthly repayments on the loan.

Interest Accumulation: Interest compounds over time, increasing the total amount owed.

Loan Amount: The amount you can borrow is typically based on your age, with older borrowers often eligible to access a higher percentage of their home’s value.

What are the eligibility criteria?

Eligibility for a reverse mortgage essentially comes down to two things: age and equity.

You generally need to be at least 60 years old and own your home. The loan amount available depends on your age, with older borrowers typically able to access a larger percentage of their home’s equity. Where a couple are living in the property, the borrowing criteria is based on the age of the youngest person.

The property also needs to meet specific value and location requirements set by the lender.

The lender will also need to be very clear on the purpose of the loan. The funds can be used in a variety of ways (see below), but you and the lender just need to be very clear about your intentions.

What Consumer Protections are there?

• Lifetime Occupancy: You retain ownership of the home and can live there as long as you choose.
• No Negative Equity Guarantee: Means you can never owe more than the property is worth.
• Independent Legal Advice required

Is a Reverse Mortgage Right for You? Here’s What You Should Know.

For retirees hoping to stay in their homes while accessing additional funds, a reverse mortgage might be the answer. But before moving forward, it’s critical to weigh the implications on your financial future – and that of your family. Here are some key questions to ask:

How will this affect what I leave behind? The loan balance grows over time, which may cut into the inheritance your loved ones could expect. Interest compounds on the loan balance, meaning the debt can grow significantly over time. This might reduce the equity you have left in your home.

Will it impact my other retirement income or benefits? In some cases, government programs may be affected by your home’s shifting equity. Additional funds or assets from a reverse mortgage might affect eligibility for government benefits, like the Age Pension, so it’s wise to check with a financial adviser and/or Centrelink. If taken as monthly instalments, as most people choose, then a reverse mortgage shouldn’t impact on the Age Pension. But always seek advice from a financial adviser regarding your specific situation.

What alternatives do I have? From downsizing to tapping other investments, it’s worth exploring options that could bring financial flexibility without the long-term costs associated with reverse mortgages.

Engaging a mortgage broker can offer clarity, helping you understand the loan’s impact, potential costs, and how compounding interest could affect your equity over time. Reverse mortgages can be a valuable resource for some, but it’s important to ensure it fits with your broader retirement plans.

Why you should speak with a mortgage broker

It used to be a requirement that you had independent financial advice before applying for a reverse mortgage. While that’s no longer the case (financial advice only required if loan proceeds are to be invested), it’s still very important that you speak with a financial advisor before deciding on this path.

Reverse mortgages aren’t offered by the big banks, so you need to know who is lending and which lender is right for you. A mortgage broker can arrange a loan from these lenders.

At Kingsbridge Private as a People + Partners company, we can provide both mortgage broking services and connect you with a People + Partners financial advisor. We’ve helped many people via reverse mortgages. If you think it’s a path worthwhile considering, pick up the phone and give us a call.