With an ageing population placing increasing pressure on Australia’s pension system, reverse mortgages are beginning to emerge as an important part of sustainable retirement planning.

With an ageing population placing increasing pressure on Australia’s pension system, reverse mortgages are beginning to emerge as an important part of sustainable retirement planning.

Reverse mortgages work by allowing people to access a portion of the equity tied up in their home. As the name suggests, the financial institution pays money to the borrower in return for an agreed amount of equity in their home.

Borrowers can choose to make repayments or defer re-paying the loan until the house is sold or the last co-borrower moves out or passes away. Funds can be accessed as a lump-sum for one-off purchases such as a car or holiday, or to provide a regular income, which is the way the product could be used to fund retirement.

With more than three-quarters of pensioners owning their own home, reverse mortgages are an option that the majority of Australians could access and are relatively under utilised.

Despite some negative associations, reverse mortgages can offer some very important benefits. HomeStart’s Seniors Equity Loan is often used to finance home maintenance and can allow retirees to remain in their family home far longer than if required to sell the house to unlock funds for retirement.

Today, the reverse mortgage market is tightly regulated with the Australian Securities and Investment Commission (ASIC) requiring lenders to provide a high level of transparency when offering the product.

This includes clearly communicating the projected impact of a reverse mortgage and other risks involved. People can only borrow up to 35 per cent on the value of their home and a no negative equity guarantee means that when the house is sold, if the proceeds of the sale are less than the amount owed to the lender, the lender cannot pursue them for the amount owing.

HomeStart also recommends that the borrowers seek independent financial and legal advice.

With Australians projected to live longer, and with between 70-80 per cent expected to continue receiving the age pension between now and 2055, reverse mortgages could form an important part of the solution to providing a more sustainable retirement system.