Written

For

The

Australian

-

Pitfalls

and

benefits

in

reverse

mortgages

and

their

cousins

Would you unlock the equity in your home if it meant surrendering a chunk of your future sale price — potentially far more than you borrowed today? That's the trade-off facing a growing number of retirees, and with the federal government expanding its Pension Loan Scheme, the topic is firmly back on the table.

There are essentially three types of retirees looking at these products: those who just want a modest income top-up, those wanting a mix of lump sums and regular payments before selling within 5-10 years, and those chasing a lump sum with no intention of selling for a decade or more.

The government's Pension Loan Scheme is fine if you're in category one — it tops up your pension by up to 150 per cent of the full rate. But it won't help if you want cash upfront for a car, caravan or overseas trip.

That's where reverse mortgages come in. Most providers allow flexible drawdowns, and importantly, you only accrue interest on what you actually draw. The catch? Interest capitalises. Interest charged on interest means the loan balance can balloon dramatically over time.

The alternative — really the only alternative in Australia — is Bendigo Bank's Homesafe wealth release product. Here's where people get caught out: you're not selling 20 per cent of today's $1 million property for $200,000. You're selling a share of the future sale price, calculated through actuarial assumptions and discounted cashflow models. Every offer is unique.

My take? Neither option is ideal. Both come with a meaningful payback when the family home is eventually sold. There is no free lunch here — just different ways of paying for it. For retirees genuinely house-rich and cash-poor, they can be useful tools, but only with eyes wide open to the long-term cost.