By Grace Bacon
Selling a long-held family home, replete with childhood memories and links to a local community, is one of the toughest emotional (and financial) decisions any retiree faces.
So, it may be tempting for ageing Australians to be told there’s an option where they can stay in their own home while unlocking some of the equity in that home – especially if they are feeling the pinch with cash flow.
Reverse mortgages have increased as equity rich but cash-poor seniors seek extra income.Credit: Getty
Every time economic conditions get tough, financial advisers see a rise in inquiries from asset-rich, cash-poor retirees about whether they should take out a reverse mortgage.
In my more than 25 years of providing financial guidance, not once have I found a situation where I thought a reverse mortgage was the best option for a client.
Let me explain why.
Fading from popularity in the aftermath of the Hayne royal commission into Australia’s banking sector (2017-19), when the major banks moved away from providing the product, the reverse mortgage is on the rise again.
Interest is compounded, so you pay interest on the interest – which can cause the loan balance to grow quickly and erode the equity you’ve built up in your home.
IBISWorld figures from 2024-25 show a rapidly growing $429.3 million market offering a solution that, at first glance, seems attractive to cash-poor seniors who don’t have assets outside their home.
Put simply, a reverse mortgage is a product that allows homeowners to unlock their home’s value to supplement their cash flow, without having to make monthly repayments.
Sounds good, right? You get to stay in your family home, keep the same social lifestyle and connections (such as cafes, gyms, doctors and friendship networks) and avoid the significant costs of moving.
However, taking out a reverse mortgage can have unintended financial consequences.
I have noticed more clients inquiring about reverse mortgages, so here is a timely reminder of the risks.
With most reverse mortgages, the loan, plus interest, is only repaid when you sell your home to move into aged care, or you die.
Interest is compounded, so you pay interest on the interest, which can cause the loan balance to grow quickly and erode the equity you’ve built up in your home.
Take the case of a retired couple living in a $2 million apartment in Sydney, with no other major assets. Their apartment block needed significant strata work, and they were looking for a way to find $200,000 for their special levy fund contribution.
Selling a long-held family home is a tough emotional decision.Credit: iStock
They thought a reverse mortgage would help them cover the levy costs and help them stay in their home.
When I did the numbers with them, a reverse mortgage would have meant that by the time they reached their 80s, they would owe significant money against the value of the property; to pay it back, they would be forced to sell their home anyway.
The high interest charges would have had a definite impact on their ability to afford aged care and also impacted the value of the estate they wanted to leave to their adult children.
Upon further consultation, the clients felt it was more appropriate to sell their current home as the risk of future repairs to the building block would cause them further financial risk while increasing debt levels, which would have eroded the value of their home and made it harder to address their longer-term needs.
Equity released from the sale was put into superannuation as a downsizer contribution. Then, taking out a pension from their super gave them accessibility and flexibility with funds to meet their income needs, without taking on the risk of accumulating debt at this stage of their lives.
This highlights that there are better ways to create cash flow without risking what is likely your biggest asset: your home.
Consider whether you have access to other means to provide you with cash flow, and only use a reverse mortgage as the last resort.
In some ways, taking out a reverse mortgage is just delaying the ultimate rite of passage decision you have to make around the timing of selling your family home.
At its heart, this is about dealing with hard emotional decisions that have to be made about when to sell a family home. Sometimes the emotion of this clouds people’s ability to decide in their best financial interests.
With cost-of-living pressures continuing and a larger proportion of retirees’ budgets needed for healthcare and aged care, a reverse mortgage may look attractive at first glance. Please do the numbers carefully.
It’s important to understand the terms and conditions (reverse mortgage contracts can be complex and convoluted), and have your adviser step you through the interest projections and what other financial options may be available.
There’s no one-size-fits-all solution – everyone’s circumstances are unique, so it’s important to get specific financial advice.
Grace Bacon is the Director of RSM Financial Services Australia (AFSL 238 282), advising clients on wealth management, retirement planning and succession planning.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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