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Reverse Mortgage Risks in Australia: Model $100,000 Over 20 Years

Retiree calculating a reverse mortgage estimate

A reverse mortgage in Australia carries a strong legal protection, the No Negative Equity Guarantee (NNEG) on loans taken out since 18 September 2012, but the main reverse mortgage risks come from interest and fees that compound and can erode your home equity. That shrinks what you can leave behind and what you can fund later. Modelling the numbers first is the decisive step.

TL;DR:

  • A $100,000 balance at 6.37% can grow to roughly $365,000 over 20 years without repayments, before establishment, ongoing, and exit fees add further costs.
  • Loans taken out on or after September 18, 2012, carry NNEG protection only if you meet contract terms; missed insurance or upkeep can void it.
  • Centrelink excludes the first $40,000 of a home equity conversion loan from the assets test for 90 days; unspent funds may count afterward.
  • Lenders must provide default, 0% property growth, and interest 2% higher projections; compare them using the offer’s actual rates and fees, not teaser terms.
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Table of Contents

How reverse mortgages work and what the NNEG covers

A reverse mortgage lets you borrow against your home without making regular repayments. The balance grows until a trigger event, usually when you sell, move into aged care or pass away. Lenders offer several ways to receive the money:

  • A lump sum paid at settlement
  • Regular payments, such as a fortnightly or monthly top-up
  • A line of credit you draw on as needed
  • A combination of these

Under the NNEG rules MoneySmart explains, loans taken out on or after 18 September 2012 must guarantee that you will not owe more than the market value of your property at sale, provided you have not breached the contract. Borrowing limits are age-linked: the older you are, the higher the share of your home’s value you can typically borrow. A younger borrower therefore starts with a smaller loan against the same home, but has more years for interest to compound.

Compound interest, fees and how equity erodes over 10 to 20 years

Interest on a reverse mortgage is usually higher than on a standard home loan, and because you defer repayments, it compounds on itself. ASIC’s review found these loans are about 2% more expensive than standard home loans on average.

Growing loan balance reduces remaining home equity

MoneySmart’s own illustrative example shows a $100,000 loan at 6.37% growing to roughly $365,000 over 20 years if no repayments are made. Your debt can more than triple while the home may not grow at the same pace.

Three cost categories push the balance higher:

  • Ongoing interest and administration fees, added to the loan each period
  • Establishment fees at the start, which are often capitalized into the debt
  • Exit costs when the loan ends, such as discharge and valuation charges

There is also an opportunity cost. Drawing equity early can leave too little for major later expenses such as aged care deposits or home modifications. Lender projections may also assume healthy property growth and ignore a health crisis or a market downturn.

How a reverse mortgage affects the Age Pension and the Home Equity Access Scheme

Money you borrow can interact with Centrelink means testing. According to the Department of Veterans’ Affairs, the first $40,000 of a home equity conversion loan is excluded from the assets test for 90 days. Unspent amounts may be assessed after that, and funds you invest can be caught by deeming.

The government runs its own product, the Home Equity Access Scheme (HEAS). Key points:

  • It is a voluntary, non-taxable loan for people of Age Pension age, secured against property.
  • Interest compounds, and it carries its own NNEG, so the amount owed at exit will not exceed market value less other encumbrances, as the Social Security Guide describes.
  • Payment caps apply, including a limit tied to the maximum fortnightly pension, so it differs from a private loan.

Because the income and assets tests can change what you receive, run the Centrelink effect through a model before you borrow, not after.

The NNEG does not stop your equity falling to zero. It only prevents you owing more than the home is worth. MoneySmart’s main site is clear that fees and compounding can consume all your equity, and that protections can be lost through a breach of contract.

Common breach scenarios include:

  • Failing to keep the home insured
  • Letting the property fall into disrepair

A breach of contract can invalidate the NNEG, leaving you exposed to a shortfall.

Responsible lending is your other safeguard. ASIC found that borrowers often have a poor grasp of long-term costs and that lenders frequently failed to document how the loan affects future goals such as aged care. ASIC says lenders and brokers should have genuine conversations about borrowers’ future needs.

Pro Tip: Ask for the NNEG wording in writing and list every obligation that could void it, then diarize the insurance and rates due dates.

How to estimate your outcome with the ASIC and MoneySmart calculator

Lenders must show you equity projections, and you can run your own. ASIC explains how in its guide to the calculator. Follow these steps:

  1. Enter your loan amount, how you plan to draw it, and your home’s value.
  2. Set the interest rate and fees to match the actual offer, not a teaser rate.
  3. Choose a property growth assumption, then test lower ones, since defaults are optimistic.
  4. Set your expected horizon, and try 10, 15 and 20 years or longer.
  5. Run all three required scenarios and print each result.

Licensees must show three equity projections: the default projection, 0% property growth, and an interest rate 2% higher. The defaults assume 3% annual property growth, but you can change every input to reflect your circumstances.

When you read the results, look at the projected equity remaining in each scenario and at the year the debt approaches your property’s value. Keep the printed projections as a decision document you can compare across lenders.

Alternatives and trade-offs: downsizing, HEAS, selling or waiting

A reverse mortgage is one route to your equity, not the only one. Weigh these:

  • Downsizing: Frees equity immediately with no compounding debt, but brings stamp duty, agent fees, moving costs and the loss of your community.
  • HEAS: A government loan with an NNEG and a different cost profile, though only for Age Pension age and with payment caps.
  • Selling and renting: Releases all your equity but exposes you to rent increases.
  • Partial sale or family arrangements: Can work if relatives can agree terms and document them properly.
  • Savings or super drawdowns: Sensible when balances can cover the gap without draining long-term security.
  • Delaying borrowing: Keeps equity intact while you can manage, and shortens the time interest has to compound.

Side-by-side modelling is the fairest way to compare these. Our home equity access modelling guide shows how to project equity under the scheme, and our piece on mortgages in retirement compares different paths.

Questions to ask before you sign

Use this checklist with lenders, brokers and advisers:

  1. Ask for all three printed equity projections and keep copies.
  2. Request the full fee schedule, including establishment, ongoing and exit fees.
  3. Get the exact NNEG wording and what would void it.
  4. Check whether voluntary repayments are allowed and whether they cost anything.
  5. Ask how moving into aged care affects the loan and when repayment falls due.

Red flags include pressure to sign quickly, missing projections, vague NNEG terms and a thin suitability check. Always get independent legal and financial advice.

Pro Tip: Take someone you trust to the meeting, and don’t sign on the day you receive the documents.

Our view on modelling a reverse mortgage inside your retirement plan

We think the decision belongs inside a whole plan, not on its own. Compare scenarios side by side and stress them with conservative property growth and interest assumptions. Include aged care costs and what you want to leave behind, then see whether the numbers still hold. Our article on sequence of returns risk matters if you plan to invest any proceeds. Finally, get independent advice before you sign anything.

— Aerowealth Team

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This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

FAQ

What are the risks associated with a reverse mortgage?

The main risks are compounding interest, fees that erode equity, and a smaller inheritance. Breaching the contract, for example by not insuring the home, can also cost you the NNEG. Your pension entitlements may change too.

What is the best alternative to a reverse mortgage?

It depends on your situation. Downsizing, the Home Equity Access Scheme, or using savings can each suit different retirees. The Home Equity Access Scheme is a government option for people of Age Pension age.

Is a reverse mortgage safe in Australia?

Loans from 18 September 2012 carry a legal NNEG, so you will not owe more than the home’s market value if you meet the contract terms. That does not protect your equity from shrinking, so model it first.

How can I check the interest and costs of an offer?

Ask for the full fee schedule and run the lender’s rate through the ASIC calculator. Compare the three projected scenarios, and ask an independent adviser to review the offer.

Sources

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