In an era of continually soaring property prices, the “Bank of Mum and Dad” has become a crucial lifeline for many young Australians striving to own a home. For retirees who have paid off their mortgage, the temptation to unlock the significant equity in their home to help their children or grandchildren with a deposit is understandably strong, often leading them to consider a reverse mortgage.
A reverse mortgage is a loan against the equity in a home, typically for homeowners aged 60 and over, which offers a lump sum, a regular income stream, or a line of credit without requiring regular repayments. The loan, along with accumulated interest, is generally repaid when the property is sold, the owner enters aged care, or from their deceased estate. This financial strategy, often framed as an “early inheritance,” appears straightforward: children get their deposit, and parents remain in their family home. However, the decision is a significant one with complex and often unforeseen “secondary impacts,” particularly concerning their ongoing financial security in retirement and the interaction with the Australian social security system.
The Centrelink Gifting Trap: Deprived Assets
For retirees relying on the Centrelink Age Pension, which is subject to both an income and assets test, the act of gifting funds from a reverse mortgage introduces a critical complication. While the principal home itself, and the reverse mortgage loan against it, are generally ignored by Centrelink for means testing—as the home is an exempt asset—the gifted amount is subject to strict “deprived asset” rules.
Centrelink permits only a small “gifting free area,” currently $10,000 per financial year for a single person or a couple, up to a maximum of $30,000 over a five-year period. Any amount gifted above this threshold is considered a “deprived asset” for a full five years from the date of the gift.
Consider a couple who gifts their children a total of $200,000 for a house deposit. Centrelink would treat $190,000 of that as a deprived asset. This amount is then counted in the retiree’s assets test and is subject to the deeming provisions of the income test. If this substantial deprived asset pushes the couple’s total assessable assets over the allowable threshold—which was approximately $884,250 for a couple who own their own home as of early 2026—their pension payments will be reduced or could be cancelled entirely. Even if they remain below the asset threshold, the deemed income from the deprived asset, regardless of the actual return, is added to any other income, which can also result in a reduction of the Age Pension payment. This interaction between a reverse mortgage and gifting rules creates a complex web of regulations that can easily catch the unwary.
Erosion of Equity: The Power of Compounding Interest
A second major long-term risk stems from the nature of the reverse mortgage itself: compound interest. As no regular repayments are required, the interest accumulates and compounds over the loan’s life, significantly eroding the equity in the home over time.
The effect of compounding is dramatic. For instance, a $200,000 reverse mortgage with a 6 per cent interest rate will balloon to a balance of $641,000 in twenty years. Similarly, a $200,000 reverse mortgage at an 8 per cent interest rate will grow to over $430,000 in just ten years. While property value growth may typically ensure the net equity is maintained, this is not guaranteed. This erosion dramatically reduces the net equity available for the homeowners later in life or for their estate upon the home’s eventual sale.
Longevity Risk and Future Needs
We are collectively living longer than ever before, which introduces the significant secondary impact of longevity risk. While the desire to help family is commendable, it must be weighed against the retiree’s own financial needs for an extended future. The equity in the home often represents a critical funding source for unforeseen later-life costs, such as medical expenses or, most notably, aged care. Once that equity has been drawn down via the reverse mortgage and subsequently gifted, it cannot be easily replaced. A reduced nest egg, particularly for the younger spouse, is a major concern; a 66-year-old wife with $500,000 in super, even with a part age pension, may not have enough to see her through a potential 30 or more years of life, especially if one spouse requires care.
Conclusion: Proceed with Caution
The decision to use a reverse mortgage for an early inheritance is a noble one, but it should never come at the expense of one’s own financial security in retirement. The risks are clear: a potentially significant reduction in Centrelink Age Pension payments for five years due to deprived asset rules, and the long-term erosion of home equity through compound interest, which may be needed to fund essential late-life care.
Before proceeding with this strategy, it is absolutely essential to seek independent advice from qualified professionals. A qualified financial planner and a lawyer specialising in elder law or succession planning can help you to:
- Understand the full impact of a reverse mortgage on your personal financial situation.
- Accurately calculate the potential effect on your Centrelink entitlements.
- Explore alternative strategies for assisting your family that may better suit your long-term circumstances.
- Ensure that any gifting arrangement is properly documented to protect your interests.
Unlocking the wealth in your home is a major step. Make sure you understand all the potential consequences, as a rash decision now could inadvertently lead to years of financial hardship later.