A ceiling on the debt
The notes to ASIC’s calculator put the protection in practical terms: reverse mortgages taken out since 18 September 2012 have it, which means the borrower cannot owe the lender more than the value of the home.
The rule itself is in the National Credit Code, and it has conditions. It applies when the amount owed on the loan, due or not, is more than the home’s adjusted market value (its market value, worked out and adjusted under the regulations where they provide for it), and the lender receives at least that value, either as a payment it accepts from the borrower or as the proceeds of its own sale of the home. Then the borrower’s obligations under the loan, and the mortgage, are discharged by law; the lender must not ask for or accept any further payment under the loan; and anything it received above the adjusted market value must be paid to the borrower. None of this applies if the borrower committed fraud, or made a misrepresentation, about the reverse mortgage, or in circumstances the regulations prescribe.
The calculator can draw the amount owing above the home’s projected value. Asked why, when the protection exists, Moneysmart answers that with a reverse mortgage the borrower will never owe the lender more than the projected value of the home.
Where the lines cross
Take this site’s illustration in the calculator’s second scenario, where the home does not grow in value at all. The home stays at $600,000; the $100,000 debt keeps compounding at 7% a year.
- At 80Home $600,000 · owed $386,968
- At 85Home $600,000 · owed $542,743
- At 90Home $600,000 · on paper $761,226
Illustration onlyWorked by hand for this guide: $100,000 borrowed once at 60, interest at 7% a year added once a year, a home held at $600,000, with no fees, drawings or repayments. Not calculator output, and not a forecast.
On these figures, with interest added once a year, the debt first passes the home’s value at 87. By 90 it stands, on paper, about $161,000 above it. That hatched part is what the protection deals with: the borrower can’t end up owing it.
When the lines would cross
Whether the debt ever reaches the home depends on the two rates the projections test: how fast the home’s value moves, and the interest rate. On the same illustration, $100,000 borrowed once at 60 against a $600,000 home, the debt would reach the home’s worth at about these ages:
| Home’s value | Interest | Debt reaches the home at about |
|---|---|---|
| Rises 3% a year | 7% a year | 108 |
| Rises 3% a year | 9% a year | 92 |
| Stays the same | 7% a year | 87 |
| Stays the same | 9% a year | 81 |
The first row is the loan as the calculator starts it; the second and third are its higher-rate and no-growth scenarios; the last puts the two together, which the calculator’s three set scenarios do not. The law’s own definition allows for this: a reverse mortgage is a loan whose debt may grow past the most that can be lent under the contract, without the borrower being obliged to bring it back down. For a loan taken out from 18 September 2012, the protection sets the other limit: the debt may outgrow the loan’s limit, but the borrower can’t end up owing more than the home is worth.
A ceiling, not a floor
The protection limits what can be owed. It does not keep any of the home’s value for the borrower or their estate: in the illustration, once the debt reaches the home’s worth, nothing of that worth is left over.
Moneysmart says a borrower may be able to protect a portion of the home’s equity from being eroded by the loan. And the law requires a lender or broker to ask whether the borrower would prefer to leave equity in the home to their estate.
The government scheme’s guarantee
A no negative equity guarantee applies to Home Equity Access Scheme loans too. Services Australia words it this way:
“This applies when you settle your Home Equity Access Scheme debt. You or your estate won’t have to repay more than the market value of the property secured against the loan, minus any other mortgages or legitimate claims on the property.”
Services Australia, repay your loan under the Home Equity Access Scheme
The limit is the market value less other mortgages and legitimate claims on the property, so it can sit below the property’s full value. Services Australia gives an example:
“For example, your loan balance is $250,000. When you sell your property, if it is only worth $200,000, and you don’t have a mortgage, then you only need to repay $200,000.”
Services Australia
The scheme’s guarantee has stated exceptions:
“The guarantee may not apply if you increase a mortgage or encumbrance, misrepresent your circumstances or commit fraud. If this happens, the full loan balance will need to be repaid.”
Services Australia
Services Australia may need to value the property before it is sold, so it can apply the guarantee correctly, and the valuation is free. The rest of the scheme is in the Home Equity Access Scheme.
Loans from before the date
The protection Moneysmart describes is tied to the loan’s start: a reverse mortgage taken out from 18 September 2012. For an older loan the contract is the document that settles whether the protection is there, which is why Moneysmart’s first step for those borrowers is to check it. What happens when the home is sold is set out in when the loan ends; how the debt reaches the ceiling at all is in how the balance grows.