Can you buy a house with a reverse mortgage?

Unlike a typical home loan, a reverse mortgage is often taken out by people who already own a home. A reverse mortgage allows equity in the home to be unlocked and used on other expenses, but it may not be easy or even possible to buy a home with a reverse mortgage. 

What is a reverse mortgage?

A reverse mortgage is a type of loan that allows people aged 60 years and over to access funds without needing to sell their home. The borrower does not need to have an income to qualify for a reverse mortgage. The amount that can be borrowed depends on the value of the property and the borrower’s age.

Although borrowers are charged interest on reverse mortgages, they do not need to make repayments. The interest accumulates and gets added to the principal. If the owner dies, then their family must repay the reverse mortgage fully from the estate. Sometimes an owner may wish to sell the house, possibly to relocate to another place or an aged care home. In these scenarios, the loan must be fully repaid. 

Given a reverse mortgage only allows you to access a relatively small portion of your home’s equity, reverse mortgages are generally used to cover costs like medical expenses and renovations. Reverse mortgages are also often used to access lines of credit as income support for your retirement lifestyle, rather than to borrow a lump sum.  

Reverse mortgage risks

Reverse mortgages carry several risks and shouldn’t be entered into without doing some research first.

Interest rates on reverse mortgages tend to be higher than those of standard home loans. Unlike a typical home loan, you aren’t required to make repayments, and the interest charges and fees are capitalised into the loan, increasing how much you owe.

While a reverse mortgage legally can’t land you in negative equity (which is where you owe more than your property is worth), it could eat up enough of your equity that when your property is sold, you or your estate may have nothing to show for it.

Taking out a reverse mortgage could also affect your age pension in some cases. For example, if your reverse mortgage is used to gift money or make an investment, it may be assessable as income under the assets test and reduce the pension amount.

While it may be possible to use your reverse mortgage to purchase another property, it may not be easy. Given that you can only access a fraction of your current home’s value with a reverse mortgage, you may not have enough cash available to buy another property outright. And mortgage lenders may not accept money borrowed from a reverse mortgage as an acceptable source of income when applying for a home loan. Plus, any money you borrow with a reverse mortgage is money that you or your estate won’t get back when your property is eventually sold.

It’s often worth getting financial or legal advice before applying for a reverse mortgage. You may also want to check with Centrelink if a reverse mortgage is likely to affect your age pension.

How else can older Australians buy property?

It is possible to get a home loan to buy a home or investment property as a pensioner or a retiree, though it may not be as simple or straightforward as it is for some other Australians.

Many banks and mortgage lenders may consider you a higher-risk borrower if they’re not confident you’ll be able to repay the loan plus interest. While you may receive income from a pension, your superannuation benefits, or from other investments, not all forms of income may be accepted by some lenders. You may also need to prepare an exit strategy when applying for the loan, so the lender can be confident that the loan will be repaid even if your circumstances suddenly change.

If you currently own a property, one alternative option could be to downsize. Selling your current home could let you use the sale proceeds to purchase another property that better suits your retirement lifestyle. You may even be left with extra money available to use elsewhere.

A mortgage broker may be able to help you find a specialist lender that provides loans to Australian seniors, and support you when completing your loan application.

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