Reverse Mortgage interest rates

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At any given time, lenders offer finance to borrowers for a wide range of purposes. Some borrowers are seeking a first home deposit, others a personal loan perhaps for medical needs, others a deposit on a new car, still others on access to wealth they have built up in their major asset, the family home.

If you are in the latter category, then it’s important to understand typical fees for a reverse mortgage as they are more commonly known.

Let’s explore the definition of such a loan, the typical fees and charges and how you can compare ‘apples with apples’ in a crowded loans marketplace.

What is a Reverse Mortgage?

The family home is a principal source of wealth. For most retirees, this represents the largest pool of individual wealth in retirement, some three-four times more than median super savings. This wealth, your home equity,  can be defined as the value of your dwelling, less any debt held against it. If you choose to release this equity, usually through a loan called a ‘reverse mortgage’ you can free up funds for a range of purposes, such as:

• Home renovation
• Medical bills
• Family loans
• Travel, or
• Topping up an Age Pension with regular income

The appeal of Reverse Mortgages lies in the fact that you can use part of your home equity (typically between 20% to 35 % of the net value, depending upon your age), while continuing to live in your home and your community. At all times you retain 100 percent ownership of your home and benefit from any appreciation in its value.

How much does such a loan cost?

Costs associated with Reverse Mortgages are determined by four main factors. These are:

• the amount that you borrow
• how you receive the amount that you borrow (e.g. a lump sum or regular income stream)
• the interest rate and fees (including valuation, loan establishment,  and ongoing fees) 
• the term of the loan

What are the current Reverse Mortgage rates?

The current rate charged by Household Capital (variable)  is 9.20% (comparison rate* is 9.23%) .

A major competitor of Household Capital is currently charging 9.75% (comparison rate 9.78%).

* Comparison rate based on a secured loan of $150,000 over a 25 year term. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates.

What is a comparison rate?

A comparison rate is one which has been adjusted to not just include the interest rate, but also certain fees and charges within the loan. The reason why comparison rates are offered is to assist consumers to understand the true cost of loans and to compare loans more accurately. The formula used by organisations which calculate comparison rates is regulated, by the consumer Credit Code. All financial institutions and mortgage providers in Australia use this approved formula. 

Are there other fees and charges?

Different providers are likely to have varied fees and charges. These may include a fee to establish the loan, valuation and conveying costs, loan variation fees or discharge of mortgage costs. Some may be third party costs that the loan providers passes on to the borrower.

Household Capital’s fees and charges can be seen here.

Are rates fixed or variable?

Rates are variable because Reverse Mortgages are flexible and can be repaid without penalty at any time.

You cannot lose your home

One common misconception is that retirees who release equity in their homes might reach a point where they have borrowed so much that they lose their home. This can’t happen. As the Moneysmart website notes, since September 2012 there has been legislation in place to ensure that those who use a reverse mortgage can never end up owing the lender more than your home is worth. This is called the ‘No Negative Equity Guarantee’ and it offers  a major point of difference from previous reverse mortgage offerings.

How do Reverse Mortgage interest rate compare to other lines of credit and loans?

Different loans suit different types of borrowers at different life stages. Here’s a brief summary with different types of loans and typical current interest rates:

Type of loan	Current* indicative interest rate	How loan is commonly used	Suits which type of borrower?
Standard Home Mortgage	5.99% – 7.77%	To purchase home and pay off	First or repeat home purchaser who has deposit funds already.
Personal loan	7.59-10.33%	Agreed purchase	You need to have a certain amount of income
Loan for car	7.29-16.99%	To purchase vehicle	$55 k limit3-5 year loan
Credit card interest	19.99-21.49%	To cover purchases on credit	Highest rates, so not competitive compared to cash rates or other types of loans.
Line of credit	16.99%	Discretionary purchases	High rates, but more flexible than a personal loan for unexpected expenses

Why are reverse mortgage rates higher than other home loans?

Reverse mortgage interest rates are generally higher than a standard mortgage because there is no obligation for borrowers to make repayments until the end of the loan. However, when compared to other forms of lending as indicated in the table above, they can offer an affordable solution to the need for extra funds, particularly for those who find banks are less willing to lend to older clients.  

How to find the best reverse mortgage rates

Comparing Reverse Mortgage rates should be relatively straightforward, but requires times and discipline to ensure you are making a direct comparison. The most thorough way to compare one reverse mortgage with another is to visit the providers’ websites and note all fees, charges and any other costs, in addition to the variable interest rate on offer. As noted above, it is helpful to check the comparison rate as this, by law, will have factored in all charges. Comparison websites can be useful, but do not always include all providers (as evidenced by recent ACCC concerns about misleading information [ https://www.smh.com.au/national/accc-keeps-an-eye-on-comparison-websites ]). There may also be a time lag between an interest rate change on a provider website and its inclusion on a comparison site.

Why are reverse mortgage interest rates higher than those of the HEAS?

The Federal Government’s Home Equity Access Scheme (HEAS) also lends money against the value of your home. The interest rate for this specific loan is 3.95%. This rate is set at the discretion of the Minister for Social Services. The current rate has not changed since the scheme changed name from the Pension Loans Scheme in 2022, even though there have been 13 Reserve Bank increases to the cash rate over this period. The reason that the rate is lower is because it is a more restrictive loan than Reverse Mortgages, with a cap of 150% of full Age Pension per annum able to be borrowed and limited access to capital amounts.

Securing a loan in your 60s

Theoretically – i.e. in the perfect consumer world –- lenders are age-neutral and you will be treated the same way as anyone else, regardless of whether you are 25, 45, 65 or 85.

But in reality, that is not the case for anyone seeking finance. Most lenders will consider the age of the borrower in light of their potential need for finance for 10, 20 or 30 years and therefore be less likely to lend to someone who may no longer be working while the loan is still in existence. If this fair or legal? Not really, but it does happen. This is why loans tailored to the needs of those aged 6o and over, such as Reverse Mortgages, can save older borrowers much stress. 

From the outset, the interest rates for Reverse Mortgages are set to match your age and the value of your property. Yes, the amount you owe will compound over time, unless you elect to make interest only payments. At the same time, the value of your home is also probably increasing, which to a large extent can ameliorate your borrowing costs.

The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Household Capital Pty Ltd and is subject to change without notice. Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable, and terms and conditions apply (available upon request). Household Capital Pty Limited ACN 618 068 214, Australian Credit Licence 545906, is the Servicer for the credit provider Household Capital Services Pty Limited ACN 625 860 764.