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[Video] How does interest on a reverse mortgage work?

18 February 2022

Understanding how interest on a reverse mortgage works is an important part of Heartland’s application process. We provide customised loan projections to every customer on application, and to them and their solicitor when they receive independent legal advice. This ensures the reverse mortgage terms are fully understood.

We have created this short animation video to help you make an informed decision. Watch it here:

[TRANSCRIPT]

How does interest on a reverse mortgage work?

If you are aged 60 or over and own your own home, a reverse mortgage is a great way to make the most of retirement, and at Heartland our award-winning reverse mortgage has already helped over 22,000 Aussies do just that!

But how does a reverse mortgage add up over time? And how much equity will you have in the property when the loan is due to be repaid?

Well, here’s an example.

Steve and Cheryl, both 70 years old, live in a house worth $750,000. They have a small mortgage, some money outstanding on a credit card and want to make some improvements to their home, so they take out a Heartland Reverse Mortgage.

From their approved loan of $100,000 they drawdown $50,000 which gives them the funds they need to pay off their debt, cover the renovation and visit the grandkids!

A year later when Steve decides to sell his car, they repay the $10,000 off the loan. This reduces the amount of interest they will be charged and provides the freedom to redraw the money in the future.

6 months later they access $10,000 to take their family on a holiday and the following year when Cheryl needs a medical procedure they drawdown another $15,000.

So, what happens to their equity over this time? Well let’s say Steve and Cheryl’s house increases in value by 3% per year and that the interest rate on the Heartland Reverse Mortgage is 7%.

Here’s what happens.

Interest is charged on the loan balance and is added to the loan monthly, known as compounding interest. This means that the loan grows over time, however the value of the home also increases. Under this scenario, after 10 years Steve and Cheryl have more net equity than they did before the loan.

This is an example, and the outcome will vary case by case depending on how much is borrowed, how long the reverse mortgage is in place, the future growth in your home value and the interest rates over time.

To run a projection using your home use the calculator from our website.

Heartland is Australia’s leading reverse mortgage provider. If you’re interested in finding out how your existing home equity could help you live a more comfortable retirement, call us on 1300 889 338, or visit our website to find out more.

To find out more, request your free Reverse Mortgage Guide, or do your own MoneySmart Loan Projection.

Information provided is accurate as of 18 February 2022 and may change from time to time.