To cope with the cost of retirement, many cash-strapped and asset-rich retirees are turning to reverse mortgages.

Changes to the age pension assets test came into effect on 1 January. This affected hundreds of thousands of retirees, some for the better and some for the worse. Many had to go back to the drawing board and work out how they could live out their retirement years in comfort. 

Roughly 300,000 retirees on the part-pension had their entitlements reduced, and 100,000 lost all their entitlements. With fewer benefits coming in, it’s easy to understand why so many retirees are turning to reverse mortgages.

What is a reverse mortgage?

A reverse mortgage is a type of home loan that enables you to borrow money using the equity in your home as security. The reverse mortgage loan can be taken as a lump sum, a regular income stream, a line of credit, or a combination of these options.

Just like any other loan, interest is charged, except that borrowers don’t have to make repayments while they live in their homes. The interest compounds over time and is added to the borrower’s loan balance. Borrowers remain the owner of their homes and they can stay in them as long as they want.

Borrowers settle the loan in full, including interest and fees, when they sell their homes or die, or if they move into aged care.

To learn more about the different types of reverse mortgage home loans, check out this search tool

The risks  

The interest rates for reverse mortgages are generally higher than for average home loans. According to InfoChoice, interest rates range around 7%, and there can be establishment costs as high as $1,050 as well as ongoing costs.

The debt can also rise quickly as the interest compounds over the term of the loan. This is the effect of compound interest and is something you need to be aware of before you commit to a reverse mortgage.

Just as importantly, taking out a reverse mortgage could also affect your pension eligibility.

Seek independent advice  

It’s vital for those who’re considering reverse mortgages to seek independent advice, said Miles Larbey, senior executive leader at ASIC’s Moneysmart.
“You need to think about the debt and the fact [that] interest will be compounding on the reverse mortgage,’’ he said. “Definitely speak to your nearest and dearest and also seek legal advice.”