How Reverse Mortgages Work: Explained in Simple Terms!

Welcome to our Blog series on reverse mortgages!  In this article, we will explain reverse mortgages in simple terms.  Whether you are a homeowner thinking about your financial future, a family member helping someone understand their choices, or just curious about how reverse mortgages work, this guide is for you.

We cover the basics – from who can get a reverse mortgage to how repayment works – to help you decide if a reverse mortgage is right for you.

What is a Reverse Mortgage?

A reverse mortgage is a product that allows you to draw on your home equity to take out a loan. Reverse mortgages are designed to use the value you have in your home to get a cash boost, regular income stream or line of credit while you remain in the property and enjoy its ongoing capital growth. Generally speaking, reverse mortgages are designed for homeowners aged 60 and above, and they can be used for a variety of reasons, ranging from funding retirement to living expenses, renovations, a holiday or medical bills.

You can receive the money as a lump sum, regular monthly income, or in flexible amounts when you need it.  The loan and interest are repaid only when you sell your home, move out permanently, or pass away.

Reverse Mortgage vs. Traditional Loans

A reverse mortgage differs from traditional loans because it works in the opposite way.  With a traditional loan, you make monthly payments to reduce the amount you owe, increasing your property equity over time.

In contrast, a reverse mortgage doesn’t require regular payments.  Instead, as you receive money and interest accrues, the loan balance grows, and your equity in the property decreases.

With a reverse mortgage, there are no monthly payments or prepayment penalties.  Depending on your financial goals, you can choose to repay some or all of the interest or any amount you want.

Reverse Mortgage vs. Traditional Mortgage: Comparison

Feature	Reverse Mortgage	Traditional Mortgage
Eligibility Age	62+	18+
Monthly Payments	Optional	Required
Loan Purpose	Access home equity	Home purchase or refinance
Interest Rates	Fixed or variable	Fixed or variable
Loan Repayment	Due upon moving out, sale, or death	Over loan term (e.g., 30 years)
Equity Depletion	Optional	No, builds equity over time
Credit Line	Yes	No

This table compares reverse mortgages to traditional mortgages. See key differences in age, payments, and rates to pick the best option for your needs.

How does a reverse mortgage work?

A reverse mortgage allows you to borrow money based on your home equity—in simple terms, home equity is the difference between the value of your home and any money you have owing on it. If the value of your home is $900,000, and you own it outright with no mortgage owing, then you would have $900,000 in equity.

That said, a reverse mortgage will not allow you to borrow the entire value of your home equity. This means that even if you have $900,000 in equity, you won’t be able to take out a reverse mortgage for this much. Instead, you will be able to borrow a percentage, which starts at 15%-20% and increases each year from age 60 onwards, up to a maximum of 35%.

A reverse mortgage is different from a standard home loan, in that you will not be required to make regular repayments on it—typically you will be required to repay your reverse mortgage when you vacate your property. Associated interest and fees will also be payable.

How much can I borrow with a reverse mortgage?

The amount of money you can get from a reverse mortgage depends on how old you are and the value of your home. The Australian Government’s Moneysmart website says if you’re aged 60 then the most you can likely borrow is between 15% and 20% of the value of your home. As a guide, you can add 1% for each year over 60. So, at 65, the most you could borrow will be about 20–25%. The minimum amount you can borrow can vary, but is generally around $10,000.

Several factors determine the loan amount:

• The age of the youngest borrower
• The value of the home or the lending limit (whichever is less)
• The current interest rates

Other factors that affect the loan amount include:

• Costs to obtain the loan (these are subtracted from the available loan amount)
• Existing mortgages and liens (these must be paid off)

Any remaining money after these deductions belongs to you.

You can use Moneysmart’s reverse mortgage calculator to get an estimate of how much you may be able to borrow, and how much you’d need to repay.

Who is eligible for a reverse mortgage?

Eligibility for reverse mortgages usually require that you be:

• An Australian homeowner

• Over the age of 60, including the youngest borrower if you are borrowing as a couple

Some lenders may also have differing minimum ages, minimum property value requirements and specific post codes that are eligible. Properties such as primary residences, holiday homes and investment properties may be considered as a security for a reverse mortgage.

How Age Affects Your Principal Limit

To get a Reverse mortgage, you must be at least 60 years old.  The Principal Limit, or the maximum amount you can borrow, is based on the age of the youngest borrower. The program uses life expectancy to estimate how long borrowers will accrue interest.

If there are multiple borrowers, the loan amount is based on the youngest person’s age.  This is because all borrowers can live in the home for the rest of their lives without making payments.

Generally, younger borrowers can accrue more interest over their lifetime than older borrowers.  Therefore, an 82-year-old borrower would start with a higher Principal Limit than a 60-year-old borrower with the same terms.

However, there are exceptions, but this is the general principle.

Exploring Reverse Mortgage Payment Options

There are several ways you can receive funds from a reverse mortgage:

• Cash Lump Sum at Closing: Receive all the money at once.
• Line of Credit: Draw money as you need it.
• Term Payment: Receive a set amount of money for a specific period.
• Tenure Payment: Receive guaranteed payments for as long as you live in your home.

Looking Ahead

A reverse mortgage can be a powerful financial tool, but understanding its full impact is essential. In this guide, we’ve covered the basics—what it is, who qualifies, and how it works.

In the next part of our series, we’ll explore the benefits and risks of reverse mortgages.

If you have any questions or need personalized guidance, our team is here to assist. Get in touch for a no-obligation chat—we’re happy to help! Stay tuned for the next part of our series.

 

Disclaimer: This blog offers general information on mortgages and finance for informational purposes only. It is not a substitute for personalized advice from a qualified mortgage professional or financial advisor. Use your discretion and seek professional guidance based on your individual circumstances.