Can you refinance a reverse mortgage?

Why do people refinance a reverse mortgage?

Common reasons include:

• A better interest rate or lower fees. Because interest compounds on a reverse mortgage, even a small difference in rate can add up over many years.
• Needing more money. Your current lender may not let you borrow more. For example, the Commonwealth Bank stopped offering its reverse mortgage from 1 January 2019, and limit increases are no longer available on those loans. See Which lenders offer reverse mortgages in Australia?
• Different features. For example, a line of credit, regular payments, protecting some equity for later, or a lifetime occupancy promise.
• Older loans without negative equity protection. Reverse mortgages taken out from 18 September 2012 must have negative equity protection. If your loan is older, Moneysmart suggests checking your contract. A new loan would come with this protection. See Can I end up owing more than my home is worth?

What will a new lender look at?

A new lender assesses you as if you were a new customer. It will look at:

• Your age now, usually the age of the youngest borrower
• What your home is worth now. The lender will arrange a valuation.
• How much you owe now, including all the interest that has been added over the years
• Its own borrowing limit for your age. Most lenders set a maximum loan as a percentage of your home's value, which rises as you get older. See How much can I borrow at my age?
• Your property type and postcode, as some lenders don't accept all areas or property types. See Which property types and postcodes do lenders accept?

The key test is simple. Your current balance, plus any extra money you want, plus the costs of switching, has to fit within the new lender's limit.

That's why refinancing tends to be easier when the loan is fairly new or small compared with the home's value, and harder when the balance has grown close to the lender's limit.

A simple example

This is an illustration only, not a quote.

Margaret is 78. Her home is valued at $800,000, and her reverse mortgage balance has grown to $240,000, which is 30% of the home's value.

A new lender's limit at 78 might be around 38% of the home's value. That's about $304,000. In that case, she could refinance her $240,000 balance with roughly $64,000 of room to spare, less the costs of switching.

If her balance had grown to $320,000 (40%), it would be over that lender's limit, and she probably couldn't refinance with that lender unless she paid some of the loan off first.

What does it cost to refinance a reverse mortgage?

Ask your current lender, and the new lender, for a full written list. Costs can include:

• Discharge fees from your current lender to close the loan
• Break costs, if your current loan has a fixed interest rate
• Establishment or application fees for the new loan
• Valuation fees
• Legal and settlement costs, including government fees to register and discharge mortgages

If these costs are added to the new loan, you'll pay compound interest on them too. Also check whether the new loan's lower rate will still leave you better off after these costs. See How much does a reverse mortgage cost?

Will I get new projections?

Yes. Before a lender or broker assesses you for a reverse mortgage, they must show you projections made with the reverse mortgage calculator on ASIC's Moneysmart website. These show how your loan balance and home equity could change over time. They must also give you a printed copy and a reverse mortgage information statement (National Consumer Credit Protection Act 2009, s133DB; see ASIC: Using ASIC's reverse mortgage calculator).

This applies when you refinance too. Ask your current lender for a projection on your existing loan as well, so you can compare the two side by side.

Can I replace a reverse mortgage with a normal home loan?

Possibly, but it's a different kind of loan. An ordinary home loan needs regular repayments, so the lender will check that you can afford them from your income. Many retirees find that hard to meet. See the story Could we replace Mum's reverse mortgage with a normal home loan? and Should I take a cash-out refinance or a reverse mortgage?

Can the Home Equity Access Scheme pay out a reverse mortgage?

Generally it isn't designed for that. The government's Home Equity Access Scheme pays a fortnightly amount, a lump sum advance, or both. Advances are capped at 50% of the maximum pension rate in any 26-fortnight period, so they're usually far too small to pay out an existing loan in one go. Your existing mortgage also reduces how much you can borrow under the scheme. Ask Services Australia how it would work for you (Services Australia: Home Equity Access Scheme).

What are the other options?

If refinancing doesn't work or doesn't save enough, you could consider:

• Staying put and reviewing the loan each year
• Making voluntary repayments, if your loan allows them, to slow the growth of the balance. See Can I make repayments if I want to?
• Selling and downsizing, which repays the loan from the sale. See Can I sell my home later if I have a reverse mortgage?
• Family help, such as children repaying part of the loan. Get legal advice first.

Steps to take before you refinance

1. Ask your current lender for a payout figure and a list of exit costs.
2. Ask your current lender whether it can offer a better rate or the feature you need.
3. Get written quotes from other lenders, including fees and the most you could borrow.
4. Compare the projections for your existing loan and the new one.
5. Check how any extra money could affect your Age Pension. See Will a reverse mortgage affect my Age Pension?
6. Get independent legal advice before you sign, and involve your family if you'd like to.

Frequently asked questions

Can I refinance a reverse mortgage to get a lower rate?

Often, yes, if you and your home meet a new lender's rules. Work out whether the saving outweighs the costs of switching.

Can I refinance a reverse mortgage to get more money?

Possibly. The new lender will only lend up to its limit for your age and home value, and your existing balance uses up part of that limit.

Can I refinance an old Commonwealth Bank reverse mortgage?

CBA no longer offers new reverse mortgages or limit increases, so some borrowers look to other lenders. Whether you can refinance depends on your current balance, age and home value.

Is refinancing a reverse mortgage the same as getting a reverse mortgage with an existing home loan?

Not quite. Refinancing replaces one reverse mortgage with another. If you still have an ordinary home loan, see Can I get a reverse mortgage if I still have a mortgage?

Do my children need to be involved?

No, it's your decision. But many families find it helps to talk it through together, and lenders encourage you to get independent legal advice.

Talk it through

If you're wondering whether refinancing your reverse mortgage could help, a Fundd broker can look at the numbers with you, with no obligation. A broker may tell you refinancing isn't worth it. Call 1300 038 633 or speak to a broker. Read how we make money.