Your Home in Retirement — Downsizing, Reverse Mortgages, and Equity Release

Your Home Is Often Your Biggest Asset

For many Australians, the family home represents the largest single asset they own. As you approach retirement, deciding what to do with that asset can significantly affect your retirement income, your Age Pension eligibility, and your overall quality of life. Broadly, there are three main options: downsizing to a smaller property, taking out a reverse mortgage to access equity while staying put, or other equity release arrangements.

Downsizing Your Home

Downsizing means selling your current home and moving to a smaller, less expensive property. The surplus cash can be added to your super (up to $300,000 per person from July 2023 under the downsizer contribution rules, available from age 55) or invested to generate retirement income. Downsizing can also reduce ongoing costs like rates, insurance, and maintenance. However, moving costs, stamp duty, and the emotional impact of leaving a long-term home should be considered.

Reverse Mortgages Explained

A reverse mortgage allows you to borrow against the equity in your home without having to make regular repayments. The loan is repaid when you sell the home, move into aged care, or pass away. You must be at least 60 years old to qualify. A key protection under Australian law is the negative equity guarantee — if the house sells for less than the loan balance, your estate does not have to make up the difference. However, interest compounds over time, which can erode your equity significantly. The longer you hold a reverse mortgage, the less equity remains for you or your beneficiaries.

Home Equity Release Alternatives

Other options include the Home Equity Access Scheme (formerly the Pension Loans Scheme), which is a government-provided loan from Services Australia that allows you to receive a regular income stream using your home as security. The interest rate is lower than commercial reverse mortgages, and it can be a useful way to supplement the Age Pension. You can also consider selling and renting, relocating to a retirement village, or using a downsizer contribution to super as mentioned above.

What Your SOA Should Cover

If your adviser has recommended using your home equity in retirement, your SOA should clearly explain the options considered, the costs and risks of each, the impact on your Age Pension entitlements, and the long-term effect on your estate. Reverse mortgages in particular require careful disclosure of the compounding interest effect.

Downsizing Your Home in Retirement

Downsizing — selling your family home and moving to a smaller, less expensive property — is one of the most common strategies for unlocking home equity in retirement. The proceeds from selling can be used to boost retirement income, pay down debt, or contribute to super through the downsizer contribution scheme. From age 55, you can contribute up to $300,000 per person (or $600,000 per couple) from the sale of your home into super.

When considering downsizing, factor in transaction costs: stamp duty on the new property (which may be lower than the duty on your current home depending on value), real estate agent fees, legal costs, and moving expenses. Also consider ongoing costs: a smaller home typically means lower council rates, insurance, utilities, and maintenance costs. The net financial benefit of downsizing is the difference between the capital freed up and the transaction costs, plus any ongoing savings in carrying costs.

Reverse Mortgages Explained

A reverse mortgage (also called a senior's loan or equity release loan) allows homeowners aged 60 and over to borrow against the equity in their home without making regular repayments. The loan is repaid when you sell the home, move into aged care, or pass away. Interest compounds over the life of the loan, which means the amount owed can grow substantially.

Key features of reverse mortgages include: no negative equity guarantee (you will never owe more than the home is worth), the ability to take the loan as a lump sum, regular income stream, or line of credit, and no requirement to make repayments while living in the home. However, reverse mortgages reduce the inheritance you leave behind, can affect Age Pension entitlements (the loan proceeds count as assessable assets), and the compounding interest can significantly erode home equity over time.

Home Equity Access Scheme (Pension Loans Scheme)

The Home Equity Access Scheme (formerly the Pension Loans Scheme) is a government program that provides regular loans to Age Pensioners who own their home. It is effectively a reverse mortgage offered by the government, but with more favourable terms than commercial products. The scheme allows you to receive a fortnightly loan advance (up to 150% of the maximum Age Pension rate) in addition to any Age Pension you already receive.

The loan is secured against your property and must be repaid when you sell the home or pass away. However, the interest rate is lower than most commercial reverse mortgages, and there is a no-negative-equity guarantee. The scheme is means-tested and designed for retirees who are "asset-rich but income-poor" — i.e., they own their home but lack sufficient income to maintain their lifestyle.

Frequently Asked Questions

Is it better to downsize or take out a reverse mortgage?
It depends on your goals. If you want to reduce ongoing costs, free up capital, and move to a more suitable property, downsizing is better. If you want to stay in your current home but need extra income, a reverse mortgage or the Home Equity Access Scheme may be more appropriate. Many retirees use a combination of both strategies.

How does selling my home affect my Age Pension?
Your home is exempt from the Age Pension assets test. When you sell, the cash proceeds become assessable financial assets. If you do not use the proceeds to buy a new home or contribute to super within a reasonable period, the cash may reduce your Age Pension. The downsizer contribution (up to $300,000 per person) is the key tool to move sale proceeds into super tax-effectively.

What happens to a reverse mortgage when I die?
When the last surviving borrower dies, the reverse mortgage must be repaid. This typically happens through the sale of the home. Any remaining equity (sale price minus loan amount and costs) goes to the estate. The no-negative-equity guarantee ensures the estate never owes more than the home is worth.

Can I get a reverse mortgage if I still have a mortgage on my home?
Some lenders allow a reverse mortgage if you have an existing mortgage, but the total amount borrowed (existing mortgage plus reverse mortgage) cannot exceed a certain percentage of the home's value (typically 20-30% of the property value). The reverse mortgage proceeds may be used to pay off the existing mortgage first.