What is protected equity in a reverse mortgage?

When considering a reverse mortgage, many retirees want to ensure that a portion of their home’s value is preserved for their future needs or for their family. Protected equity is a feature that allows you to do just that.

By setting aside a percentage of your home’s equity, you can guarantee that a portion of your property’s value will remain intact—no matter what happens to your loan balance or the property market.

In this article, we’ll explore how protected equity works, its benefits, and whether it’s the right choice for you.

What is protected equity?

Protected equity is an optional feature that lets borrowers safeguard a set percentage of their home’s value.

This means that when the property is eventually sold, a predetermined amount of equity will be reserved for you or your estate, even if the loan balance has grown over time.

Not all lenders offer this feature, and some may charge a fee for it. However, it can provide peace of mind—especially if leaving an inheritance is important to you.

How protected equity works

Protected equity works by reducing the amount you can borrow. Here’s how:
✔ You choose a percentage of your home’s value to protect (e.g., 10%).
✔ Your maximum loan amount is adjusted based on the protected equity percentage.
✔ That portion of equity is guaranteed to remain available, regardless of market conditions or loan growth.

Example: How protected equity works in practice

Let’s say a homeowner owns a property worth $1,000,000 and is eligible for a $250,000 reverse mortgage.
🔹 They choose to protect 10% of their home’s value ($100,000).
🔹 Their new maximum loan amount is reduced to $225,000 (instead of $250,000).
🔹 Regardless of how much their loan balance grows, the lender must return the $100,000 protected equity when the home is sold.
This ensures that even if property values fluctuate or interest accumulates, a portion of the home’s equity will be preserved.

What happens in different scenarios?

1. If property values decrease
   Imagine a significant market downturn reduces the home’s value to $500,000. Over time, the reverse mortgage loan has grown to $900,000.
   ✅ Despite the shortfall, the lender must return the $100,000 protected equity to the borrower (or their estate).
2. If property values increase
   If the home appreciates at 3% per year, after 15 years it may be worth $1.5 million. Even if the loan balance has grown to $900,000, the borrower (or their estate) still retains $600,000 in equity.
   ✅ In this case, the protected equity wasn’t necessary—but it provided peace of mind.

Pros and cons of protected equity

✅ Benefits of protected equity
✔ Guarantees a portion of home equity remains intact for you or your heirs.
✔ Provides peace of mind if property values decline or loan interest compounds.
✔ Ensures financial certainty when planning for your estate.

⚠️ Things to consider
🔹 Lower borrowing capacity – The more equity you protect, the less you can borrow.
🔹 Not always necessary – If you expect your property to appreciate significantly, you may not need this feature.
🔹 Lender availability – Not all lenders offer protected equity, and some may charge fees for it.

Is protected equity right for you?

Protected equity can be a valuable option for retirees who want to preserve part of their home’s value. However, it’s not always needed, especially if you expect your property to grow in value over time.

If you’re unsure whether this feature is right for you, Your Home Equity can help you explore your options and find the best solution for your needs.

Reverse mortgage protections in Australia

Reverse mortgages in Australia come with strict government regulations to protect borrowers. Key safeguards include:

✔ No Negative Equity Guarantee (NNEG): You will never owe more than your home’s value—even if the market declines.
✔ Full ownership rights: Your home remains in your name, and you can sell it at any time.
✔ Clear loan terms: Reverse mortgages come with transparent conditions, so you know exactly what to expect.
✔ Independent legal advice: Seeking legal advice is mandatory before taking out a reverse mortgage to ensure you understand your obligations.

Want to learn more?

At Your Home Equity, we specialise in reverse mortgage broking for Australians over 55. Our team can help you find the best lender and determine whether protected equity is right for you.

If you’d like to explore your options, contact us today for a free, no-obligation consultation.