Will a reverse mortgage affect your Age Pension?

A YourLifeChoices member has a query about reverse mortgages and the Age Pension.

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Q. Will a reverse mortgage affect my eligibility for the Age Pension?

A. Reverse mortgages are a relatively easy way to release the equity in your home.

But first, what exactly is a reverse mortgage?

Let’s clear up some simple terms first. ‘Equity’ means the value of your home, less any money you owe on it (your mortgage).

‘Home equity release’ lets you access some of that equity without selling your home so you can stay in the property. And one of the ways you can release that equity is through a reverse mortgage.

A reverse mortgage essentially is a loan a homeowner takes out using the equity in their house as security.

Read: Time to tap into a reverse mortgage given soaring prices?

It can be taken as a lump sum, regular income or line of credit. You can also choose to have a combination of those three options.

You do not have to make any repayments unless you sell the property, but of course you can make repayments earlier.

The amount you can borrow depends on your age, the value of your property and the type of equity release you have chosen.

Reverse mortgages can be a handy financial product to have if you require extra income to maintain your home, travel or improve your quality of life, and can be ideal for those who are asset rich but cash poor.

Reverse mortgages have had a poor reputation in the past, but the government has legislated controls to protect consumers, including a statutory regulation that borrowers cannot end up owing more than the house is worth.

How do they work?

You have reached retirement age, no longer have an income, own a house worth $1 million and your home needs renovations or maintenance work. You can take out a $100,000 loan to fund the renovations and when you pass away your children or your beneficiaries sell the home at the current market price of $1.2 million. The lender would be owed $100,000 plus any interest.

It’s worth noting that reverse income products generally come with a higher interest rate than usual home loans.

Check out the government’s handy reverse mortgage calculator to see how much you can borrow.

Read: Can you get a reverse mortgage if you don’t live in a city?

How will a reverse mortgage affect the Age Pension?

Eligibility for the Age Pension depends on two tests: the assets test and the income test.

A reverse mortgage will affect the Age Pension depending on what you spend it on.

If you spend the money on what Centrelink defines as an asset such as a car or boat, then it may affect your pension as it would combine with the cost of your other assets and may exceed the cost limit, which would reduce or cancel your pension.

Check out how much you can own in assets here.

If you spend the money on a non-assessable asset such as a holiday or renovations on your home, it is not assessed under the assets test.

However, it will be subject to the assets test if the funds build up in a bank account.

If you take the money as an income stream and use it to spend on non-assessable assets or living expenses it will not affect the Age Pension as it isn’t counted as income in the income test.

If you choose a line of credit option, money not yet used is not assessed under either the assets or income test.

Read: How a panel of economists sees the year ahead.

What next?

Do your research carefully before considering a reverse mortgage.

Consult an independent financial adviser, a lawyer and contact Centrelink’s Financial Information Service before signing anything. 

Reverse mortgages can be a useful tool to improve your quality of life after you retire but they can also come with hidden costs.

The interest can be higher than usual lending rates and product options are limited due to lack of competition, making it hard to ‘shop around’.

Some loans may also affect other people living in the home. Contracts usually require the secured property to be sold once the person taking out the mortgage passes on, and anyone else living in the house may have to move out.

Have you considered a reverse mortgage to supplement your retirement income? Are you more comfortable with a reverse mortgage since the government put controls in place. Why not share your thoughts in the comments section below?