When helping people as a vendor’s advocate rather than a buyer’s agent, I need to know all the options available for a client. Sometimes, this does not include selling and downsizing. Occasionally, the best choice is to stay in the family home and look at other ways to adequately fund a retirement.
This option can include a reverse mortgage, but this is a financial product not widely understood or appreciated. A reverse mortgage allows a retiree to access equity in their home without making regular repayments. Retirees commonly use it to supplement income, cover medical expenses, or improve their quality of life.
How does it work?
The homeowner must be 60 years or older. No repayments are required while the borrower lives in the home. The loan, plus interest, is repaid when the house is sold or the borrower moves into aged care. The mortgage amount available depends on the borrower’s age and the property value.
Pros and Cons:
✅ Benefits:
- Provides financial flexibility for retirees.
- No regular repayments are required.
- Borrowers continue living in their homes.
- In Australia, there is no negative equity guarantee.
⚠️ Risks:
- Interest compounds over time, increasing the total debt.
- Reduces the inheritance left for beneficiaries.
- Future home equity may be limited.
Costs
Interest rates on a reverse mortgage are higher than the standard rate. The three leading mortgage providers, Household Capital, Heartland Bank and Inviva, have an interest rate of around 9%.
LVR Calculation
The LVR is the Loan-to-Value Ratio. How much can you borrow? An example best explains the calculation. Jane (60) and John (70) apply for a loan. Their property is valued at $1 million. The LVR is calculated by subtracting 40 from the youngest applicant’s age. 60-40=20. A 20% LVR allows the couple to borrow $200,000.
Is it right for you?
A reverse mortgage can be a valuable financial tool, but it is essential to seek independent financial advice and explore alternatives like downsizing or government pension schemes before committing. I am happy to discuss this option with any past or future client.
“We were feeling the weight of financial stress. At 78 and 69, owning a $3 million home in Byron Bay should have given us security, but with a $300,000 mortgage, a $85,000 business overdraft, and $150,000 in outstanding tax, it felt like we were drowning. On top of that, health issues were making it harder to keep up.
Our business was doing well, but the pressure was relentless. That’s when we decided to refinance with a Reverse Mortgage—and it changed everything. We consolidated our debt, freed up capital for much-needed renovations, took a holiday for the first time in years, and even set up a cash reserve, giving us flexibility and peace of mind.
We still run our business and pay loan interest when we can to reduce the compounding effect, but the constant pressure is gone. Now, we’re back in control, living life on our terms. It was the best financial decision we could have made!” — Richard & Rachel, Byron Bay