How much does a reverse mortgage cost?

What fees do you pay to set up a reverse mortgage?

Most reverse mortgages have some upfront costs. Depending on the lender, these can include:

• an establishment or application fee to set up the loan
• a valuation fee, because the lender needs to know what the home is worth
• legal and settlement costs, including the lender's costs and government registration fees for the mortgage

Some of these can be added to the loan rather than paid from your pocket. That feels easier on the day, but it means you pay interest on those fees for as long as the loan runs.

Fees vary between lenders and change over time, so we haven't listed amounts here. Ask for a full written list of fees before you apply, and check which ones will be added to the balance.

Are there ongoing fees on a reverse mortgage?

Some reverse mortgages charge ongoing fees, such as a monthly or annual account fee. Others don't. If there is an ongoing fee and it is added to the loan, it compounds along with the interest.

It is also worth asking whether there are fees for:

• drawing extra money later, if you have a line of credit
• making voluntary repayments
• changing the loan, or paying it out early
• getting a payout figure when the home is sold

How does interest add to the cost of a reverse mortgage?

Interest is usually the biggest cost by far.

On a reverse mortgage, interest is charged on the amount you owe and then added to the loan. Next time, interest is charged on the new, higher balance, including the interest that was added before. This is compound interest, and it is why the balance grows faster the longer the loan runs.

Moneysmart notes that the interest rate on a reverse mortgage is likely to be higher than on a standard home loan.

We explain this in more detail in How does interest work on a reverse mortgage?

Why does the cost depend on how you take the money?

You can usually take a reverse mortgage as a lump sum, regular payments, a line of credit, or a combination of these, depending on your age and the lender's policy.

If you take a large lump sum on day one, interest starts on all of it immediately, even if the money sits in a bank account for years. If you draw smaller amounts only when you need them, interest is generally charged only on what you have drawn. Over a long retirement, that difference can be large.

See Can I take the money as a lump sum, regular payments or a line of credit?

What does a reverse mortgage cost over 10, 15 or 20 years?

There is no single answer, because it depends on your figures. But Moneysmart gives a worked example that shows the pattern clearly.

In the example, a couple aged 70 and 65 own a home worth $500,000. They borrow $125,000 as a lump sum to renovate, allowing $1,000 for set-up fees, using the default interest rate in Moneysmart's reverse mortgage calculator. Fifteen years later, assuming the home grows in value by 3% a year, the home is worth about $780,000. They own 54% of it and owe the lender 46%, about $359,000.

In other words, a $125,000 loan had grown to almost three times that amount after 15 years. After seeing the numbers, the couple decided to get financial advice and consider borrowing less.

That is an illustration only, not a prediction. Interest rates, fees and property values change, and your own result could be better or worse.

Can you see the cost before you sign?

Yes, and the law requires it.

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, of how your loan balance and home equity could change over time, including what happens if interest rates rise or property values change
• give you a printed copy of those projections
• give you a reverse mortgage information statement

(National Consumer Credit Protection Act 2009, section 133DB; ASIC: Using ASIC's reverse mortgage calculator)

Take the projections home. Look at the less favourable scenarios as well as the hopeful ones, and talk them through with family and an adviser.

You can also try the Reverse Loans calculator yourself, or our own projection calculator, which runs in your browser and doesn't ask for personal details.

Can the cost ever be more than your home is worth?

Not for reverse mortgages taken out from 18 September 2012. These have negative equity protection, which means you can't end up owing the lender more than your home is worth. If you took out a reverse mortgage before that date, check your contract, or ask your lender or an independent adviser.

Negative equity protection stops the debt growing beyond the home's value. It doesn't stop the loan using up most of your equity, which is why the projections matter. See Can I end up owing more than my home is worth?

How can you keep the cost of a reverse mortgage down?

Some practical ways to limit the cost:

• Borrow only what you need. The less you borrow, the less interest compounds.
• Draw money as you need it, rather than taking everything up front, if the lender offers that option.
• Ask about voluntary repayments. Paying some interest when you can may slow the growth of the balance. See Can I make repayments if I want to?
• Ask about protecting part of your equity. Moneysmart notes you may be able to protect a portion of your home equity, for example to help pay for aged care later. Availability varies by lender.
• Compare the alternatives, including the government's Home Equity Access Scheme, downsizing, or other support. See What's the difference between a reverse mortgage and the Home Equity Access Scheme?

Are there costs that aren't on the fee schedule?

Yes, and families often forget them:

• Independent advice. Moneysmart recommends getting independent advice from a financial adviser or legal professional before applying for any home equity release. Ask for a quote up front.
• Effects on the Age Pension. How you use the money can affect your pension. Ask the Services Australia Financial Information Service. See Will a reverse mortgage affect my Age Pension?
• Less equity for later. The equity the loan uses can't be used again for aged care, a move, or what you leave to family.

Frequently asked questions

Is a reverse mortgage more expensive than a normal home loan?

Usually, yes. Moneysmart says the interest rate is likely to be higher than a standard home loan, and because interest is added to the loan rather than paid off, the total cost can grow quickly over time.

Do I have to pay anything while I live in the home?

Generally you don't have to make regular repayments while you live there, although you may be able to make voluntary repayments. You still need to meet the loan conditions, such as insuring and maintaining the home.

When is the cost paid?

The loan, including interest and fees, is usually repaid in full when you sell the home, move out permanently, or your estate sells it.

Will my children have to pay the cost?

Not from their own money. The loan is repaid from your home or estate. See Will my children have to pay anything back?

Talk it through

If you'd like to understand what a reverse mortgage could cost in your situation, a Fundd broker can go through the projections with you, with no obligation. A broker may tell you a reverse mortgage isn't right for you. Call 1300 038 633 or speak to a broker. Read how we make money.