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Ask Paul: Should we take out a reverse mortgage?

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Thinking about taking out a reverse mortgage to fund renovations? Starting in your 50s could cost you big.

Reader question

Hi Paul, my wife is 60 and I'm 57. We both work permanent jobs, me full-time and my wife permanent part-time.

ask paul should we take out a reverse mortgage

There are some companies saying we can access a reverse mortgage loan from age 55. Can you offer advice on this and recommend a suitable broker?

We plan on using the money to renovate. - Mark

Paul's response

No, let's not do this, Mark. I am a strong supporter of the concept of a reverse mortgage, but with many caveats.

I think they can work well for older Australians. Quite frankly, the older you are the safer they are, but a reverse mortgage is compound interest in reverse.

Also, they can be expensive. Expect to pay close to 9% interest, plus application fees. At ages 57 and 60, this could really build up a lot of debt quite quickly.

I would argue they are valuable for an older couple, in particular, a couple receiving a pension. In this instance, they can apply for a Home Equity Access Scheme via Services Australia. As a government initiative, the interest rate is terrific, 3.95%.

In your case, you both have permanent jobs, one full-time and one part-time. I don't want anyone selling you a high-interest reverse mortgage.

My view is that you should apply for a mortgage, where you would be paying interest of about 5%.

I understand you may have cashflow issues and want a reverse mortgage so you can renovate, with no repayments. But at quite young ages, I really fret about how this debt will compound over time.

Sure, you may have many personal issues driving this idea that I don't know, maybe you have no dependants you wish to leave money to or any number of specific personal reasons for seeking 
a reverse mortgage.

Before committing to a reverse mortgage, please do your research carefully and understand the impact of the building debt against your home. Above all, it is essential you talk to an experienced solicitor before signing a reverse mortgage contract.

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Paul Clitheroe AM is the founder of Money and serves as the publication's editorial adviser. One of Australia's most trusted personal finance experts, Paul has spent decades helping Australians build wealth, manage debt and make smarter money decisions. He is widely known for host­ing the Money TV program and authoring best-selling personal finance books. Since launching Money in 1999, he has played a leading role in delivering practical, independent financial guidance to Australians. Paul is chair of InvestSMART Financial Services. He was the founding chair of Ecstra Foundation, a national not-for-profit focused on improving financial wellbeing, from 2018 to 2026, and led the Australian Government's Financial Literacy Board and Financial Literacy Australia from 2004 to 2019. In academia, Paul is chair in financial literacy at Macquarie University, where he is also a Professor in the School of Business and Economics. Ask Paul your money question. Due to volume, Paul cannot respond to questions posted in the comments section.