Set the borrowing and property assumptions

What a reverse mortgage does

A reverse mortgage lets an eligible homeowner borrow using home equity as security. Unlike an ordinary principal-and-interest mortgage, the borrower commonly does not make regular repayments while continuing to live in the home. Interest and fees are added to the balance, so the amount owed compounds.

Money may be taken as a lump sum, regular payment, line of credit or combination, depending on the product. The loan is generally repaid when the borrower sells, permanently leaves the home or dies, subject to the contract. Existing secured debt may need to be repaid from the facility before new cash is available.

This page treats the existing mortgage payout and new lump sum as amounts borrowed at the start. It adds an establishment fee to the loan, then compounds monthly interest before adding each monthly payment and ongoing fee. A lender may calculate interest daily and time payments differently, so use the product’s official calculator and contract for a decision.

Debt growth and home-value growth are separate assumptions

The raw loan projection is mechanical: each month, the current balance earns one-twelfth of the entered annual rate, then the regular draw and monthly fee are added. The home projection applies the entered annual property change for the selected years. Neither rate is forecast by the calculator.

A 7% loan rate and 3% property growth do not mean equity simply falls by 4% a year. Interest compounds on a changing loan balance, regular draws add new principal over time, and property growth compounds on the full home value. The starting sizes matter.

Projected raw LVR divides the raw loan balance by projected home value. Equity is home value minus raw debt, not below zero. Equity share is that amount as a percentage of projected value. Selling costs, property maintenance, renovations, tax, estate expenses and market liquidity are not included.

Australian negative equity protection

Moneysmart explains that reverse mortgages taken out since 18 September 2012 have negative equity protection. When the home is sold, the borrower or estate cannot owe the lender more than the home’s market value; the lender must accept the sale proceeds as full settlement, subject to the legal protection.

The calculator still displays the raw mathematical balance because that shows the effect of the entered interest, fees and draws. The “NNEG sale-settlement cap illustration” is the lower of raw debt and projected home value. It is not a prediction of sale proceeds or a legal determination. Market value, sale process, contract compliance and the exact law matter.

Protection against owing beyond the home’s value does not protect the intended inheritance or guarantee enough equity for aged care, relocation, repairs or selling expenses. Equity can be exhausted even though no residual debt is pursued.

Age and lender LVR limits

Reverse-mortgage products commonly set a maximum borrowing percentage based on the youngest borrower’s age. They can also impose minimum and maximum property values, geographic restrictions, valuation rules, minimum draw amounts and property-condition requirements. Moneysmart’s calculator lets users select lender-specific product assumptions because there is no universal national LVR table.

This page asks for an entered maximum starting LVR and compares it with the initial balance, including the establishment fee. Passing that arithmetic screen does not establish eligibility or capacity. The lender may exclude some proposed use, require existing debt to be repaid, lower its valuation or change the available limit.

If there are joint owners or residents, confirm who must be a borrower and what happens if one person dies, moves into care or remains in the property. Obtain legal advice on occupancy protections and repayment events before signing.

Worked 15-year projection

Assume a 70-year-old homeowner has a $900,000 home and refinances a $50,000 existing mortgage. They take a $100,000 new lump sum, receive $500 a month for 15 years, add a $2,500 establishment fee and a $10 monthly fee, and model 7% annual interest.

The initial balance is $152,500. Regular cash received over 180 months is $90,000, so total modelled loan benefit including the existing payout and lump sum is $240,000. Because interest is added each month, the raw balance after 15 years is much greater than the amounts received and fees alone.

At 3% annual property growth, the home projection also rises. The remaining-equity result compares those two paths. The stress setting raises the loan rate by two points and reduces property growth by two points, showing how sensitive the inheritance and relocation buffer can be.

Voluntary repayments and rate changes alter the path

Some contracts allow voluntary repayments without requiring normal monthly principal and interest. A repayment made early reduces the balance on which later interest compounds, so it can have a larger long-term effect than the same repayment near the end. This calculator does not include repayments; subtracting one from the lump-sum input is not equivalent when payment timing differs.

Variable rates can change repeatedly during a 15- or 20-year loan. The single entered rate assumes every month uses the same annual rate. Recalculate at several constant rates and request the lender’s own projection, but recognise that no constant scenario reproduces an unknown future sequence.

Regular draws also matter by timing. Funds received monthly join the balance gradually, while a large upfront lump sum incurs interest from the start. If the money is not needed immediately, compare staged access and line-of-credit terms with the security, fees and availability risks in the real product.

Compare alternatives and non-financial consequences

Moneysmart identifies other equity-release and support options, including the Australian Government Home Equity Access Scheme for eligible older Australians. Downsizing, selling and renting, family arrangements, ordinary credit, home modifications, budgeting changes or targeted assistance can produce different costs and risks.

A reverse mortgage can affect Age Pension means testing when borrowed money is held or invested, aged-care funding, tax, future borrowing, estate planning and beneficiaries. The impact depends on how money is drawn and used. Services Australia, a licensed financial adviser, a solicitor and a tax adviser may each address different parts.

Discuss the plan with family or intended beneficiaries where appropriate, but protect the borrower’s autonomy and watch for financial abuse. Do not sign under pressure or transfer control of proceeds without independent advice.

Documents and questions to review

Ask for a written projection at multiple interest and property assumptions, including no growth and longer duration. Compare the comparison rate, contract, credit guide and product disclosures. Preserve independent advice and signed documents.