Reverse mortgages are on the rise in Australia.

This type of specialty lending offers older (often cash-strapped) homeowners the chance to borrow money against the equity of their homes. That equity is used as a security in the loan.

Reverse mortgage services, once considered niche, have become increasingly common since the Australian federal government's version – also known as the Home Equity Access Scheme, or HEAS – underwent revisions in 2019, making them more widely available. Add to that Australia's aging demographics, coupled with a cost of living crisis that is making it harder to make ends meet, and it's not hard to see why the products are in demand.

Historically, retirees without added savings had the option to move to a smaller home, or take out a short-term loan with a lower interest rate. But those smaller loans require repayments and some sort of income to pay them back.

The government-funded HEAS had more than 12,000 participants at the start of 2024, up from approximately 9,700 in 2023, according to Australia's Department of Social Services. There are also borrowers going to commercial lenders, many of which have reported increased demand for reverse mortgages. New Zealand-based Heartland Group said it had a 20% rise in reverse mortgages for the first half of 2024. Gateway Bank said its reverse mortgage business grew 81%, year-over-year, in 2024, or the 12 months ending in June 2024.

Reverse mortgages provide other opportunities too for those who don't want to move out of their home, such as money to renovate, travel or for aging parents to put a large chunk of cash in the hands of their adult children who want to make a down payment on a house of their own

Not every bank or lender offers reverse mortgages. In fact, Australia's four big banks don't offer the product, so borrowers need to seek out smaller banks or non-bank lenders for the loan. Some lenders include Heartland, Gateway Bank, P&N Bank, Australian Seniors Advisory Group, IMB Bank and G&C Bank.

The age of entry depends on the lender, as do interest rates. The government-funded Home Equity Access Scheme offers the lowest rates at 3.95%. But there are a number of restrictions, including that the loan must be paid back and the size of the loan, which caps at 150% of the borrowers' pension value.

For those who want to take out a larger loan, commercial reverse mortgages have fewer restrictions. But interest rates can be as much as 10% on a compounding annual basis. Additionally, borrowers are not required to pay back the loan until the last borrower leaves the home, either by way of selling the home or passing away.

There are a number of other requirements for all borrowers. Most notably, the property has to be mortgage free. That means if a borrower has a balance on an existing mortgage, they have to use that lump sum from the reverse mortgage to pay it off first, and can then use the rest for living expenses.

The lender ultimately determines the amount of the reverse mortgage based on a number of factors, including the youngest borrower's age, but it could be as high as 20% of the value of the home. That means a reverse mortgage loan on a property worth $2 million has the potential to offer a 60-year-old borrower $400,000 in cash, $600,000 for a 70 year old, and so on.

The implications of the reverse mortgage scheme have been controversial, so borrowers need to be aware of the potential downsides.

First and foremost, since no repayment is required on commercial loans, adult children or other family members expecting to inherit property once the borrower passes away, might be surprised to find that more is owed on the home than expected. Or that they have to take out a new mortgage to pay off the reverse mortgage.

This can cause further problems if home prices in a given area haven't risen faster than the interest rates on the reverse mortgage – which are higher than normal and compound yearly, slowly eating into the equity accrued over time.