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Your Reverse Mortgage Summary
When you're a homeowner in Australia needing extra cash for retirement, releasing equity might seem like a solution. But what happens to your existing mortgage? Here's the real deal. A reverse mortgage is the typical way equity release works in Australia. Unlike traditional loans, you don't make monthly payments. Instead, the loan balance grows as interest compounds over time. You can usually access up to 50% of your home's value, depending on your age and property value.
What is equity release in Australia?
In Australia, equity release usually means a reverse mortgage a financial product allowing homeowners aged 60+ to access home equity without monthly repayments. This isn't a new concept globally, but Australia has specific rules. For example, you must be at least 60 years old, own your home outright or have a small mortgage, and live in the property as your primary residence. The ASIC (Australian Securities and Investments Commission) oversees these products to ensure lenders follow fair practices under the National Consumer Credit Protection Act (NCCP).
How existing mortgages interact with equity release
If you already have a mortgage, the reverse mortgage funds must pay it off first. Let's say you owe $150,000 on your current mortgage and release $200,000 in equity. The lender uses $150,000 to settle your existing loan. The remaining $50,000 becomes available for your use. You can't keep both loans-you can't have a reverse mortgage while still paying off a traditional mortgage. The process is straightforward: the reverse mortgage pays off the old debt before you access any cash.
Step-by-step process of releasing equity
- Check eligibility: You must be 60+ and own your home. Lenders usually require your home to be worth at least $200,000.
- Get a property valuation: A professional assesses your home's current market value. This determines how much equity you can access.
- Apply for a reverse mortgage: Lenders review your application. They'll check your age, property value, and existing debts.
- Pay off existing mortgage: The reverse mortgage funds settle your current loan. Any leftover cash is yours to use for expenses, medical bills, or home improvements.
- Start the new arrangement: No monthly payments are required. The loan balance grows as interest compounds over time.
What happens after your mortgage is paid off
After paying off your existing mortgage, the reverse mortgage becomes your only loan. You won't make monthly payments, but interest accumulates daily. For example, if you release $100,000 at a 5% annual interest rate, after 10 years, the loan balance could grow to over $160,000. This happens because interest compounds on top of previous interest. Over time, this can significantly reduce your home equity. By age 80, a $100,000 reverse mortgage might grow to $200,000 or more, depending on interest rates. This means less money for your family when you pass away.
Risks to consider
While reverse mortgages can help, they come with risks. First, compounding interest means your debt grows faster than you might expect. Second, this could affect your Centrelink benefits. If you have more than $40,000 in assets (including cash from equity release), your Age Pension might be reduced. Third, your home equity shrinks over time, leaving less for inheritance. Finally, early repayment fees can be steep-some lenders charge up to 3% of the loan amount if you repay within the first few years.
Alternatives to equity release
Before committing to a reverse mortgage, consider these options:
| Option | How it works | Pros | Cons |
|---|---|---|---|
| Downsizing | Sell your home, buy a smaller one, and use the surplus cash | Reduces ongoing costs; frees up cash; no debt | Moving costs; emotional impact; may not suit your lifestyle |
| Remortgaging | Refinance your existing mortgage for better terms | Lower interest rates; possible cash out; manageable repayments | Monthly payments; fees; requires income to qualify |
| Government schemes | Use programs like the Pension Loans Scheme | Low interest rates; no home equity risk; government-backed | Strict eligibility; limited cash access; only for pensioners |
Frequently Asked Questions
Can I keep my existing mortgage and release equity?
No. When you release equity through a reverse mortgage in Australia, the funds must first pay off any existing mortgage. For example, if you owe $100,000 on your mortgage and release $150,000 in equity, $100,000 goes to settle the loan, and the remaining $50,000 is available for use. You can't have both a traditional mortgage and a reverse mortgage active at the same time.
How much equity can I release?
Typically, you can access up to 50% of your home's value. This depends on your age-older homeowners can release more. For instance, a 70-year-old might access 40% of their home's value, while an 80-year-old could access up to 50%. Lenders also consider property location and condition. A $500,000 home might let you release $200,000-$250,000.
Does equity release affect Centrelink benefits?
Yes, it can. If you use the cash from equity release as an asset (like keeping it in a savings account), it counts toward your Centrelink asset test. For singles, assets over $40,000 may reduce your Age Pension. If you spend the cash immediately on home repairs or medical bills, it usually doesn't affect benefits. Always check with Centrelink before proceeding.
What happens to the loan when I die?
When you pass away, your home is typically sold to repay the reverse mortgage. Any remaining equity goes to your estate or beneficiaries. If the sale price doesn't cover the loan balance (which can happen if interest compounds heavily), you're protected by ASIC rules-your family won't owe more than the home's value. This is called a "no negative equity guarantee," which is standard in Australia.
Are there fees for reverse mortgages?
Yes, there are setup fees, valuation fees, and legal costs. Setup fees usually range from $1,000-$3,000. Valuation fees are around $300-$500. Some lenders charge exit fees if you repay early-up to 3% of the loan amount in the first year. Always ask for a full fee breakdown before signing. Compare lenders carefully; some offer fee-free options for larger loans.
