In short: A reverse mortgage lets a homeowner aged 60 or over borrow against their home with no required repayments. The interest compounds and the debt is repaid when the home is sold or the last borrower moves into care or dies. Every reverse mortgage written since 18 September 2012 carries a statutory no negative equity guarantee, so you can never owe more than the home is worth. It is a genuine option and an expensive one.
We treat this product cautiously. It solves real problems for people who are asset rich and income poor, and it can quietly consume an inheritance or the funds needed for future aged care. Both of those sentences are true at once, and anyone who tells you only one of them is selling.
How the debt grows
There are no repayments, so the interest is added to the balance and then earns interest itself. That compounding is the whole story.
Worked example: $100,000 drawn at age 70
A retired couple own a $900,000 home outright and draw $100,000 as a lump sum. Reverse mortgage rates sit above standard home loan rates; for illustration we use 8.50% p.a., compounded monthly.
| Years elapsed | Owner's age | Debt owing | Home value at 3% p.a. growth | Equity remaining |
|---|---|---|---|---|
| 0 | 70 | $100,000 | $900,000 | $800,000 |
| 5 | 75 | $152,700 | $1,043,300 | $890,600 |
| 10 | 80 | $233,200 | $1,209,500 | $976,300 |
| 15 | 85 | $356,100 | $1,402,100 | $1,046,000 |
| 20 | 90 | $543,800 | $1,625,400 | $1,081,600 |
The debt roughly doubles every 8.5 years at that rate. After 20 years the $100,000 borrowed has become $543,800 owing. The equity still grows in this example only because the assumed house price growth outruns the compounding, and that assumption is doing enormous work. At 1% annual growth instead of 3%, the same table shows equity falling from $800,000 to about $555,000 over the twenty years.
Model it both ways before you decide. ASIC's MoneySmart reverse mortgage calculator does exactly this and is the tool we use with clients, because it is independent and it shows the pessimistic case.
The protections that apply
- No negative equity guarantee. Since 18 September 2012 every new reverse mortgage contract must include it. If the sale proceeds are less than the debt, the shortfall cannot be claimed from you, your estate or your beneficiaries, provided you have met the contract terms such as maintaining the property and keeping it insured.
- Projections must be shown. Credit providers must show you projections of the effect on your equity, using an ASIC-approved methodology, before you enter a reverse mortgage.
- Responsible lending applies. Reverse mortgages are regulated consumer credit under the National Consumer Credit Protection Act, with specific additional obligations. See the NCCP Act.
- AFCA. Disputes go to the Australian Financial Complaints Authority.
How much can be borrowed
The maximum is driven by age, not income. A common industry rule of thumb is 15% to 20% of the property value at age 60, rising by roughly one percentage point per year of age.
| Age of the youngest borrower | Typical maximum loan as a share of value | On a $900,000 home |
|---|---|---|
| 60 | 15–20% | $135,000–$180,000 |
| 65 | 20–25% | $180,000–$225,000 |
| 70 | 25–30% | $225,000–$270,000 |
| 75 | 30–35% | $270,000–$315,000 |
| 80 | 35–40% | $315,000–$360,000 |
| 85+ | 40–45% | $360,000–$405,000 |
Limits vary by lender and are usually lower for units, rural property and certain postcodes. Drawing the maximum available is rarely the right choice, because the compounding starts on the whole amount from day one.
The government alternative that is usually cheaper
The Home Equity Access Scheme, run by Services Australia, is a government reverse mortgage available to people of Age Pension age who own Australian property. It has historically charged a materially lower interest rate than commercial reverse mortgages, and it also carries a no negative equity guarantee.
| Home Equity Access Scheme | Commercial reverse mortgage | |
|---|---|---|
| Interest rate | Set by the government; historically well below commercial reverse mortgage rates. Check the current rate with Services Australia. | Commercial pricing, typically above a standard home loan |
| Payment type | Fortnightly income stream, or up to two lump-sum advances a year within limits | Lump sum, income stream, line of credit or a combination |
| Maximum | Combined pension plus loan capped at 150% of the maximum fortnightly pension rate | Age-based percentage of property value |
| Eligibility | Age Pension age, own Australian real estate, meet residency requirements. You do not have to be receiving a pension. | Generally 60+ |
| Best for | Supplementing income steadily | A single large need, such as a renovation, care costs or clearing a debt |
If your need is a modest, steady income supplement, check the government scheme first. Anyone who does not mention it to you is not giving you the full picture. Details are on the Services Australia website, and general guidance is at moneysmart.gov.au.
The alternatives worth considering first
- Downsizing. Selling and buying something smaller releases equity outright with no compounding debt. People aged 55 and over may also be able to make a downsizer contribution to superannuation from the proceeds of selling a home held for at least ten years, within contribution limits. Confirm the current age and cap with the ATO.
- The Home Equity Access Scheme, as above.
- A standard home loan or line of credit, if there is genuinely serviceable income. Some lenders offer loans to retirees where there is a credible exit strategy such as a documented plan to downsize. This avoids compounding entirely because you make repayments.
- A family arrangement. Adult children lending or buying a share. This needs proper documentation and legal advice for everyone involved, precisely because it is a family arrangement. See buying property with a partner and guarantor legal responsibilities.
- Bridging finance, if the real problem is timing between selling one home and buying the next. See bridging loans.
- Refinancing what you already owe. If there is still a mortgage on the home, moving it to a sharper rate can free up more cash flow than a reverse mortgage releases. See refinancing, when to refinance and our refinance calculator.
Things people find out too late
- The pension. A lump sum you draw and hold as savings is an assessable asset for the Age Pension assets test and is deemed under the income test, which can reduce your pension. Money spent on the home is treated differently from money sitting in a bank account. Get advice from a Services Australia Financial Information Service officer before drawing a large lump sum. That service is free.
- Aged care. Home equity is often the funding source for a residential aged care refundable accommodation deposit. A reverse mortgage consumed over fifteen years is equity that will not be there when it is needed.
- The family. Adult children are frequently surprised. Have the conversation early. It is your home and your decision, but a surprise at the estate stage causes real damage.
- Contract obligations. You must generally keep the home insured, maintained, and rates paid, and you must usually continue to live there. Moving into care can trigger repayment, sometimes after a grace period.
- Both names. If only one partner is on the loan and that partner dies, the survivor may face repayment. Where both are eligible, both should be borrowers.
Frequently asked questions
Can I lose my home with a reverse mortgage?
Not by the debt exceeding the value, because of the no negative equity guarantee. You can be required to repay, which usually means selling, if you breach the contract: failing to insure or maintain the property, failing to pay rates, or permanently ceasing to live there. Read the events of default in the contract carefully and get independent legal advice before signing.
Do I need to make any repayments?
No repayments are required, and that is the defining feature. You can make voluntary repayments on most products, and doing so dramatically reduces the long-run cost because it interrupts the compounding. If you can afford some repayments, a standard loan or a line of credit is usually cheaper than a reverse mortgage.
Will a reverse mortgage affect my Age Pension?
It can. Drawing a lump sum and holding it as savings or investments makes it an assessable asset and subject to deeming under the income test, which may reduce your pension. Money spent immediately on the home or on care is treated differently. Speak to Services Australia's free Financial Information Service before you draw.
Is the money I receive taxable?
No. Borrowed money is not income, so a reverse mortgage drawdown is not taxable. Interest on a reverse mortgage over your own home is not deductible either, because the home is not producing income. If part of the money is used for an income-producing purpose, the deductibility of that portion is a separate question for your tax agent.
Can I still leave the house to my children?
Yes. Your estate inherits the house and the debt, and the debt must be repaid, usually from the sale proceeds or by a beneficiary refinancing it. The no negative equity guarantee means the estate never owes more than the property fetches. What the children receive is the equity that remains, which is why the projection table above matters so much.
Is GNT Finance able to arrange a reverse mortgage?
We can, and we will also tell you when we think you should not have one. Given the compounding, the pension interaction and the aged care consequences, our normal practice is to ask you to see an independent financial adviser and a solicitor first, and to involve your family if you are comfortable doing so. Some lenders require independent legal advice in any event.
Talk to GNT Finance
If you are considering releasing equity in retirement, start with an honest conversation about what the money is for and what it will cost over fifteen years, not five. We will model the government scheme alongside the commercial option and point you to independent advice where it is warranted. Consultations in English, Nepali or Hindi, with an interpreter in your language on request. Book a free consultation or call 0426 403 703.
This page is general information only and not legal, tax or financial advice. Reverse mortgages have long-term consequences for your equity, your pension and your estate. Rates, scheme rules and thresholds change — confirm current details with Services Australia, ASIC's MoneySmart, and an independent financial adviser.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.