Will a reverse mortgage impact my Centrelink payments?

Many Australians aged 60 and over are turning to reverse mortgages to access the equity in their homes, providing them with the financial flexibility to enjoy their retirement without selling their property. However, a common concern is whether taking out a reverse mortgage will impact Centrelink benefits such as the Age Pension.

The good news is that in most cases, a reverse mortgage does not directly affect Centrelink payments. However, the effect of a reverse mortgage on your Age Pension depends on how the funds are managed. Here’s what you need to know:

1. Lump Sum Payments

If you choose to take out a lump sum from your reverse mortgage, the amount you receive is not considered income by Centrelink. This means it won’t reduce your pension payments based on the income test. However, if you don’t spend the lump sum and instead keep it in a bank account or invest it, those funds will be counted as an asset. The assets test could then reduce your pension, depending on how much is left unspent or how it is invested.

For example, if the lump sum is saved in a high-interest account or invested in shares, the returns on those investments may affect the income test, but the lump sum itself will be assessed under the assets test.

2. Monthly Instalments or Regular Payments

If you decide to take your reverse mortgage as regular payments (e.g., monthly instalments), these payments are not classified as income for Centrelink purposes. Therefore, they will not affect your Age Pension under the income test. This is an important point, as many retirees mistakenly believe that receiving regular reverse mortgage instalments would reduce their pension—this is not the case.

However, if the monthly payments accumulate in a savings account over time and are not used, they may eventually be considered an asset, impacting the assets test.  “Switching off” the regular instalments would therefore be a crucial step – and perhaps even repaying some of the money back into the reverse mortgage loan account.

3. How the Assets Test Could Apply

While reverse mortgage payments are not considered income, they can still affect your Centrelink entitlements through the assets test, particularly if you retain the funds in the form of savings, investments, or purchase new assets. If your total assets (including savings and investments) exceed certain limits, your Age Pension payments could be reduced.

For single homeowners, the maximum allowable assets for full pension eligibility (as of 2024) is $301,750, and for part pension, it’s $622,250​ (Home – Moneysmart.gov.au). Anything above these thresholds can reduce the pension under the assets test.

4. The No Negative Equity Guarantee

A positive aspect of reverse mortgages taken out after September 2012 is the No Negative Equity Guarantee (NNEG), which ensures that you or your estate will never owe more than the value of your home, regardless of the loan balance​. This offers peace of mind as it protects both you and your family from any financial shortfalls.

5. Government’s Home Equity Access Scheme as an Alternative

Another option to consider is the Australian Government’s Home Equity Access Scheme (HEAS), which provides a similar structure to a reverse mortgage but is designed to supplement your income in retirement.  This scheme is administrated  by Centrelink. This could be an alternative to a reverse mortgage for those looking to modestly increase cash flow with no risk to their pension​ (Home – Moneysmart.gov.au)​.

Final Thoughts

For most retirees, a reverse mortgage offers a way to tap into home equity without impacting their Centrelink payments, as long as the funds are used as outlined. Lump sums, regular payments, or a combination of the two can be tailored to your financial situation, with careful consideration of how unspent funds might be assessed under the assets test.

Before proceeding with a reverse mortgage, it’s advisable to seek professional advice to understand how it aligns with your retirement goals and pension entitlements.

For more detailed information, visit YourHomeEquity, Moneysmart or Services Australia.