Home Reversion vs. Reverse Mortgage: best Australian equity release options

By Darren Moffatt

July 10, 2024


Understanding your financial options in retirement is crucial, especially if you are dealing with the increasing cost of living in Australia

Home Reversion Schemes and Reverse Mortgage loans are two methods to unlock the equity in your home without selling the property, and downsizing. 

Recently a prominent Australian home reversion scheme was featured in the media, and we have been receiving more questions about this option lately. But there are many different home reversion schemes in operation around the world. 

NOTE: this article does not relate to any specific home reversion scheme, and is general in nature. Each scheme has its own set of criteria and contract terms, which are often very complex and involve proprietary algorithms. Independent legal advice is strongly recommended when assessing home reversion schemes (as it is for Reverse Mortgages). 

Let’s examine Home Reversion schemes, highlight the key differences from Reverse Mortgage, and figure out which might be the better choice for you. 

What is Home Reversion Senior’s Equity Release?

A Home Reversion scheme involves selling a portion of your home to a reversion provider. In return, you get a lump sum or regular payments, but you still have the right to live in your home rent-free or for a minimal fee for the rest of your life.

Key Features of Home Reversion:

  • Property transaction: home reversion schemes are not loans they are part-sale property transactions. As such, they are not as heavily regulated as loan products such as Reverse Mortgage which fall under the National Consumer Credit Protection (NCCP).    
  • Ownership: You sell a share of your home’s future sale value. The provider may buy this share at a discount to the current market value. Or their share may increase a bit each year so that their effective shareholding in your home increases significantly over time.  
  • No Interest: There’s no interest because it’s not a loan. Instead, the provider gets their share of the sale proceeds when the home is eventually sold.
  • Equity Release Options: Typically, the payout is a lump sum, though some plans might offer regular payments.
  • Eligibility: Generally available to homeowners aged 65 or older.

How Home Reversion Differs from Reverse Mortgage

While both options let you access your home’s equity without moving out, they work in distinct ways.

A Home Reversion scheme operator gives you cash now in exchange for part ownership of the home. They get paid back when you sell the home in future, usually for a higher price. They will share in any capital gains, and may claim a higher share of the ultimate sale value than at the start of the contract.  

A Reverse Mortgage is a loan where you borrow against the equity in your home. The loan amount, plus interest and fees, accumulates over time. Repayment is deferred until you sell the home, move out permanently, or pass away.

[ WATCH WEBINAR REPLAY: Navigating the Cost of Living for Seniors: How Reverse Mortgages Can Help ] 

Key Differences between Home Reversion and Reverse Mortgage

Key Differences Home Reversion Reverse Mortgage
Ownership and Equity You sell a part of your home upfront, possibly at a discounted rate, which may effectively reduce your equity immediately. You retain full ownership, and equity decreases gradually as the loan balance grows with accrued interest.
Repayment and Interest No interest charges; the provider takes their ultimate share when the home is sold. The provider’s share may grow each year, spending on the provider’s contract.  Interest compounds over time, and the loan is repaid from the sale proceeds of the home. Borrower can pay monthly interest to stop the debt growing.
Flexibility in Funds Typically offers a lump sum, occasionally regular payments. Provides various options like lump sum, regular payments, line of credit, or a combination.

Home Reversion Scheme may be a good option if:

  • You are 65 years or older.
  • You need a lump sum of money upfront.
  • You prefer not to deal with interest accruing over time.
  • You are comfortable selling a portion of your home’s equity at a discounted rate.
  • You plan to live in your home for the rest of your life.
  • You want to avoid monthly repayments.
  • You are okay with the reversion provider receiving a share of the future sale proceeds of your home.
  • You think the property market will be flat, or declining in future (generally, home reversion schemes make most of their money from the future capital gains of your home, so if you don’t expect strong capital growth home reversion could be a relatively cheaper option)  

Reverse Mortgage may be a good option if:

  • You are 60 years or older.
  • You want to retain full ownership of your home.
  • You need flexible access to funds (lump sum, regular payments, line of credit, or a combination).
  • You are comfortable with your home equity decreasing gradually due to compounded interest, OR you can afford to make regular interest payments to stop the debt growing
  • You prefer not to make monthly repayments, with the loan repaid when you sell your home, move out permanently, or pass away.
  • You are aware that this option might affect your eligibility for certain government benefits like the Age Pension.
  • You need a solution to help manage the rising cost of living.
  • You think a) interest rates will be mostly average or lower in future and b) the property market will deliver average or higher rates of future capital gains on your home.  (extended periods of very high interest rates combined with a flat or declining property market over the same period may increase the cost of a Reverse Mortgages, relative to other options)    

Why Reverse Mortgage Might Be Better for Australian Seniors

1. Retain Ownership and Control:

With a Reverse Mortgage, you keep full ownership of your home, offering a sense of security and control over your living situation. This is crucial for seniors who want to stay in their homes without losing ownership.

2. Flexible Access to Home Equity Funds:

The flexibility in receiving funds—whether as a lump sum, regular payments, or a line of credit—allows you to tailor the financial support to your needs. This is particularly useful for managing ongoing living expenses, unexpected medical costs, or home improvements.

3. Gradual Equity Reduction:

Unlike Home Reversion, where you may effectively lose a significant portion of your home’s equity upfront, Reverse Mortgage reduces your equity gradually as the loan balance increases. This can be beneficial if your property’s value appreciates over time, potentially leaving more equity for your estate.

4. Impact on Government Benefits:

While both options can affect eligibility for government benefits, Reverse Mortgage might offer more strategic ways to manage this impact. The flexible payout options allow you to structure the funds in a way that could minimise the effect on benefits like the Age Pension.

5. Adjusting to Rising Living Costs:

With the cost of living increasing in Australia, having access to a steady stream of funds or a substantial lump sum through a Reverse Mortgage can provide the necessary financial cushion. This ensures that you can maintain your standard of living without the immediate and significant equity loss associated with Home Reversion.

[ RELATED POST: Reverse Mortgages Explained: Will the Bank Own Your Home?

Learn more about Reverse Mortgages here. 

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before you make any decision.

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