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What is the loan-to-value ratio on a reverse mortgage?
A reverse mortgage is one of the most common ways for seniors to access their home equity without selling the property. This type of loan is used to supplement their retirement income, manage expenses, and maintain a good lifestyle after retirement.
If you’re over 60 and considering applying for a reverse mortgage, you’ll want to know how much you can borrow. As with any other loan, there are many parameters to determine your borrowing capacity. These can include your age, property value, loan duration, lender, and the loan-to-value ratio (LVR).
How does a reverse mortgage work?
With a reverse mortgage, you can take out a loan using your home as security. You can receive the loan amount as a lump sum, a regular income stream, a line of credit, or a combination of any of these options.
You may be inclined to opt for this form of borrowing because, unlike a conventional home loan, you don't have to make monthly repayments. However, be aware that the compound interest will continue to be charged on the principal amount. You will have to repay the entire amount, including the interest, when you sell your home or move into aged care, or your benefactors will have to do so when you pass away.
To take out a reverse mortgage, you'll usually need to have 100% equity in the property, meaning you’ve repaid your mortgage in full. Some lenders may allow you to take out a reverse mortgage if you still have a small amount remaining on your home loan, though this may affect how much money you can access from your reverse mortgage.
Calculating your loan-to-value ratio for a reverse mortgage
Before applying for a reverse mortgage, you may wonder how much you can borrow? How is the amount calculated? What is the maximum LVR threshold for a reverse mortgage? How much do I need to repay?
There are many factors that determine how much you can borrow. One of these is your age. Only Australians above the age of 60 are eligible to take on a reverse mortgage. As a 60-year-old, you can generally borrow up to 15-20% of your home's value. Your borrowing capacity will increase as you grow older. As a guide, Moneysmart suggests adding 1% for each year over 60. So, when you turn 70 years old, you may be able to borrow up to 25-30% and by 80 years of age around 35-40%. The minimum you can borrow varies, but is typically about $10,000.
The value of your property is a key factor affecting how much you can borrow. This amount will be a certain percentage of the total value of your home equity. This percentage is known as the LVR. On a reverse mortgage this is calculated by dividing the amount you want to borrow by the total value of your property. Most lenders allow you to borrow anywhere between 15-45% of your property's total equity.
Examples of LVR against a range of different home and loan values:
Home value | Loan Amount | LVR |
$500,000 | $200,000 | 40% |
$750,000 | $300,000 | 40% |
$900,000 | $250,000 | 28% |
$1,000,000 | $450,000 | 45% |
$1,200,000 | $350,000 | 29% |
$1,500,000 | $650,000 | 43% |
To get a better idea of the amount you can borrow compared to your home equity, you can use the Reverse Mortgage Calculator provided by either Moneysmart or the Australian Securities & Investments Commission (ASIC).
It’s important to understand that you will have to answer a few questions about yourself and your property, including:
- Your age
- Identification details
- The projected annual change in property value
Based on the results you receive, you'll better understand how much you will owe over time and the impact a reverse mortgage can make on your home equity.
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Product database updated 18 Apr, 2024
