How Reverse Mortgage Interest Builds Up Over Time

With a reverse mortgage, regular repayments are generally not required while the borrower remains in the home under the loan terms. Instead, interest is added to the loan balance. Future interest is then calculated on the larger balance, so the debt can grow through compound interest.

The long-term cost therefore depends on more than the starting interest rate. The amount borrowed, when it is drawn, how long the loan runs, fees and any voluntary repayments can all affect the future balance.

A reverse mortgage projection often shows both the future loan balance and an assumed future property value. Property growth is uncertain, so it is useful to test several assumptions — including 0% growth — rather than relying on a single optimistic figure.

The remaining home equity is the difference between the property value and the loan balance at that point in the illustration. For eligible reverse mortgages taken out from 18 September 2012, Australian negative equity protection limits the amount ultimately repayable in accordance with the applicable law and arrangements. That protection does not stop the mathematical loan balance from growing in an illustration; it affects the amount ultimately recoverable.