If you are aged 60 or over, own your home and need to access money, 'home equity release' may be an option.

As there are risks involved it is best to consider the long-term financial impact, advantages and disadvantages. It is essential to get independent financial or legal advice before you go ahead.

How home equity release works

'Equity' is the value of your home, less any money you owe on it (on your mortgage). 'Home equity release' lets you access some of your equity, while you continue to live in your home. For example, you may want money for home renovations, medical expenses or to help with living costs.

Equity release may be available in the form of a Reverse Mortgage. The amount of money you have access to using equity release depends on your age, the value of your home and the type of equity release.

A decision to release equity could affect your partner, family and anyone you live with, therefore it is important to take your time to talk it through, get independent advice and make sure you understand what you're signing up for.

What is a Reverse Mortgage?

A reverse mortgage allows you to borrow money using the equity in your home as security. If you are aged 60, the most you can borrow is likely to be 15–20% of the value of your home. As a guide, add 1% for each year over the age of 60. So, at 65, the most you can borrow will be about 20–25%. The minimum you can borrow varies but is typically about $10,000.

Depending on your age, you can take the amount you borrow as a:

• regular income stream
• line of credit
• lump sum, or
• a combination of these.

How does a Reverse Mortgage Work?

A reverse mortgage allows you to stay in your home and does not require you to make repayments while living there. Interest charged on the loan compounds over time, so it gets bigger and adds to the amount you borrow. When you sell or move out of the home you repay the loan in full, including interest and fees.

Some banks and lenders may allow you to make voluntary repayments earlier if you wish. You may also be able to protect a portion of your home equity from being eroded by the loan. For example, to ensure you have enough money left to pay for aged care if you need it in the future.

What are the costs involved in a reverse mortgage?

Reverse mortgage costs depend on how much you borrow if you take the amount you borrow (for example, a lump sum will cost more due to compounding interest), the interest rate and fees (for example, loan establishment, ongoing fees, valuation), and how long you have the loan.

Advantages of a reverse mortgage

• You remain the owner of your home and continue to live in it.
• A small amount of money each year could supplement your income in retirement.
• A lump sum may fund renovations on your home so you can stay in it longer.
• You could free up money for an urgent need, such as medical treatment.
• It may help secure aged care accommodation until you sell your home.

Disadvantages of a reverse mortgage

• Over time, your debt will grow, and your equity will decrease.
• Interest and fees compound and add considerably to your loan balance.
• The interest rate is likely to be higher than on a standard home loan.
• It could affect your eligibility for the Age Pension.
• It could affect your ability to afford aged care.
• It could eat into the money you need for future medical bills or home maintenance.
• You may not have enough money left for living expenses or to support your family, if needed.
• If you are the sole owner of your home and someone lives with you, that person may not be able to stay when you move out or die.

If you are borrowing to invest, it puts your whole home at risk — not just the portion you are investing.

Negative equity protection

Reverse mortgages taken out from 18 September 2012 have negative equity protection. This means you cannot end up owing the lender more than your home is worth (market value or equity). If your reverse mortgage contract does not include negative equity protection, talk to your mortgage broker or get independent legal advice on what to do.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.