How much equity is needed for a reverse mortgage?

If you’ve retired, you may be wondering how you may cover the expenses that used to be covered by your income. If you own your own home and have repaid your mortgage completely, you could use this equity in your home by taking out a reverse mortgage. But lenders often require you to have a certain amount of equity built up before offering you a loan of this type. 

What is a reverse mortgage?

A reverse mortgage is a type of property loan usually used by pensioners or retirees to access some of the equity they’ve built up in their homes to pay for living costs. You can either choose to get a lump sum, ongoing payment, line of credit, or a combination of these options. This money can be used to supplement your pension, manage home and medical expenses, purchase another property or cover the costs of moving to assisted living.

The primary benefit of using a reverse mortgage rather than other loans is that you don’t have to make any repayments whilst you live in the property. However, you do have the option of making voluntary repayments. You will have to repay the reverse mortgage in full, including the interest which has been compounding and any fees when you or your estate sells the property.

How much equity is needed for a reverse mortgage?

To take out a reverse mortgage, you'll usually need to have 100 per cent equity in the property, meaning you’ve repaid your mortgage in full. Some lenders may allow you to take out a reverse mortgage even if you still have a small amount remaining on your home loan, though this may affect how much money you can access from your reverse mortgage. 

How much can you borrow with a reverse mortgage?

The amount you can borrow for a reverse mortgage depends on your lender, property value, loan duration, the loan to value ratio (LVR), and most importantly, your age. Each lender that offers reverse mortgages has a minimum and maximum threshold usually based on the LVR you can borrow. The most significant impact on how much you can borrow is usually your age; the older you are, the higher your borrowing capacity.

You won't be able to get into negative equity (where you're borrowing more than your property is worth), and each lender has its own limits. The general guidelines lenders follow are:

1. If you are 60 years old, you’ll be able to borrow between 15-20 per cent of your property's value.
2. As you age, your borrowing capacity will increase by 1 per cent per year.
3. By the age of 70, you can borrow up to 25-30 per cent.
4. By 80 years of age, it’s around 35-40 per cent. 

To get a rough idea of the amount you may be able to borrow, we recommend using the ASIC Moneysmart reverse mortgage calculator. Just answer a few simple questions about your age, property value, number of borrowers, and you’ll get a rough guide on what you may be able to borrow.

How much does a reverse mortgage cost?

Just like any other mortgage on the market, a reverse mortgage has various fees you need to pay. A few of these include:

• Establishment fee: $500 – $995
• Application to increase the credit limit: $395 – $950
• Application to lease, sub-divide or introduce an easement onto the property: $0 – $500
• Ongoing administration fee: Up to $12
• Loan discharge fee: $300 – $400

A reverse mortgage will also be charged interest which will compound and be added to your loan amount unless you’re making repayments. Interest rates vary depending on the lender but are generally 1% higher than traditional home loans.

A reverse mortgage might seem like a great way to get some cash flow when you hit big expenses and no longer earn a regular income. However, it’s a big financial commitment at a time when you may want to be relaxing and enjoying life. Before jumping into getting a reverse mortgage, it may be wise to speak to a financial advisor. They can explain all the implications of the mortgage on your current and future financial position.

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