Releasing equity from your home: HEAS vs commercial reverse mortgage, side by side

If you want to release some of the equity tied up in your home without selling it, Australia offers two main paths. The first is the Home Equity Access Scheme (HEAS) — the government-run scheme administered by Services Australia (formerly the Pension Loans Scheme, renamed and expanded in 2022 to cover more retirees, including self-funded ones). The second is a commercial reverse mortgage from one of a small number of specialist private lenders. Both work the same way at a structural level: a loan secured against your home, with interest compounding rather than being paid each month, and the loan repaid when the home is eventually sold, you move into permanent aged care, or your estate is administered (Services Australia, https://www.servicesaustralia.gov.au/home-equity-access-scheme; MoneySmart, https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release). Both now carry a mandatory Negative Equity Guarantee — you (or your estate) can never owe more than the value of the home. But two big differences shape the decision: the interest rate is dramatically lower under the HEAS (currently 3.95% per annum) than under commercial products (typically in the 7–9% range), and the HEAS caps the amount you can borrow at levels tied to the Age Pension rate — so it is great for a modest ongoing supplement, but not flexible enough for a large lump sum. The right choice depends on the shape of what you need, and the compounding gap means the choice can matter by hundreds of thousands of dollars over a long retirement.

Are both products loans against the home?

Neither product requires you to make any regular repayments while you are living in the property. Interest accrues and compounds on the balance each year, and the loan is repaid when the property is sold or your estate is wound up. The Negative Equity Guarantee — built into the HEAS, and mandatory for commercial reverse mortgages taken out from 18 September 2012 (MoneySmart, https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release) — means that even if the compounding balance would otherwise exceed the home's value, you or your estate cannot be required to pay the difference. From a Centrelink perspective, the drawdowns are not income for the Age Pension income test (they are borrowed money, not earnings), so receiving them doesn't reduce your pension on that side. Where care is needed is that any lump sum you receive and hold as cash is an assessable asset (and deemed for income) like any other savings — so the timing of a lump-sum drawdown, and what you do with the money, matters for the means test.

Why is the interest rate the most important difference?

The HEAS rate is set by government policy and is currently 3.95% per annum, compounding each fortnight on the loan balance until the loan is repaid (Services Australia, https://www.servicesaustralia.gov.au/home-equity-access-scheme). Commercial reverse mortgages, from a handful of specialist lenders, are typically priced in the 7–9% per annum range — close to or above standard home loan rates. A four-to-five percentage point gap doesn't sound enormous until you let it compound. The classic rule of thumb is that a balance at 3.95% roughly doubles every 18 years, while at 8% it doubles every 9 years. Over 15 years, a $200,000 starting loan at the HEAS rate grows to about $358,000; at 8% it grows to about $634,000 — almost double the HEAS figure, and the difference comes straight out of the equity that would otherwise pass to the estate. For most retirees who will hold a reverse mortgage for a decade or more, the rate difference is the dominant factor in the economics.

How does eligibility differ?

The HEAS is available to anyone of Age Pension age (currently 67) who owns real estate in Australia to use as security (Services Australia, https://www.servicesaustralia.gov.au/home-equity-access-scheme), and since the 2022 expansion you don't have to be receiving the Age Pension to qualify — self-funded retirees of pension age are eligible, as are people receiving the Disability Support Pension, Carer Payment, or Service Pension. Commercial reverse mortgages are generally available from age 60 (some lenders from 65) to any qualifying homeowner; income tests and credit assessments are light, because there are no regular repayments, but the lender still assesses the property and the borrower's circumstances.

What's the biggest practical difference after the rate?

The HEAS caps the fortnightly payment, combined with any actual Age Pension, at 150% of the maximum Age Pension rate, and allows up to two lump-sum advances per year, each capped at a fraction of the annual maximum pension (Services Australia, https://www.servicesaustralia.gov.au/home-equity-access-scheme). The maximum loan balance also depends on age and property value, with older borrowers permitted to borrow more because life expectancy is shorter. Commercial reverse mortgages instead apply an age-based loan-to-value ratio (LVR): at 60 the most you can borrow is typically about 15–20% of the home's value, rising by roughly 1% for each year over 60, so by 80 and above it is commonly around 35–45% (MoneySmart, https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release). There is usually no special cap on lump sum versus drawdown structure within those LVRs, so if you need a large up-front amount — a major renovation, an aged-care refundable accommodation deposit (RAD) top-up, debt consolidation — commercial products can usually provide it where the HEAS can't.

What about drawdown structures and fees?

The HEAS gives you a clean choice of fortnightly payments (paid alongside any actual Age Pension), up to two lump-sum advances per year, or both, with no application fees, no ongoing fees, and no early termination fees — the only ongoing cost is interest (Services Australia, https://www.servicesaustralia.gov.au/home-equity-access-scheme). Commercial reverse mortgages offer more drawdown flexibility — a single large lump sum, regular income, an approved cash reserve drawn down as needed, or combinations — but come with application fees (often around $1,000 to $3,000), the cost of mandatory independent legal advice (commonly $500 to $1,500), valuation costs, and sometimes ongoing account fees and early termination charges in the first few years.

When is each the right choice?

The HEAS clearly wins for a modest ongoing supplement to the pension (an extra few hundred dollars a fortnight), for a long expected term (where compounding makes the rate gap decisive), and for any retiree of Age Pension age who qualifies. For these cases — which is most of them — the HEAS is overwhelmingly the better economic answer, and there is no good reason to default to a commercial product first. A commercial product may be the right choice where you need a large lump sum that exceeds the HEAS limits (a major renovation, an aged-care RAD top-up, debt consolidation), where you want specific features the HEAS doesn't offer (cash-reserve facilities, fixed-rate periods), or where you aren't eligible for the HEAS. In every case, the higher rate of commercial products has to be modelled honestly — there is no escaping the compounding gap by ignoring it.

Should you consider the alternatives first?

Equity release isn't the only way to access wealth tied up in the home. Downsizing to a smaller property can release cash with cleaner economics, and a downsizer super contribution can put up to $300,000 per person into super from the sale proceeds (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/how-to-save-more-in-your-super/downsizer-super-contributions). The exempt-home strategy — using existing assessable savings to renovate, repair, or pay down a mortgage on the principal home — can achieve a related goal (improving the Age Pension for an asset-tested retiree) without borrowing at all. And family arrangements (direct gifts within the gifting limits, granny flat structures) can sometimes substitute. A reverse mortgage is one option among several, not the default first move.

What does the comparison look like in practice?

These two cases show the comparison in practice. They are illustrative only and not personal advice.

Sara, 73, is on the full Age Pension and finds her budget just a bit tight — she would like an extra $300 a fortnight (about $7,800 a year) to cover energy bills, occasional dental costs, and small travel. She has been speaking to a broker about a commercial reverse mortgage. On these facts, Sara's use case is the textbook HEAS scenario: the amount she needs is modest, the term will be long (at 73, the loan won't be repaid until she sells, moves to care, or dies, perhaps 15 to 20 years away), and she is already on the Age Pension, so HEAS eligibility is immediate. At the HEAS rate of 3.95% (Services Australia, https://www.servicesaustralia.gov.au/home-equity-access-scheme), a fortnightly drawdown of $300 accumulating over 15 years sits at roughly $155,000 by the end of that period; at a commercial 8% rate, the same drawdown sits at roughly $220,000 — about $65,000 more debt eating into her estate, simply because of the rate. On these facts it is generally rational to introduce the HEAS (her broker hadn't mentioned it), confirm her eligibility, set up the fortnightly drawdown, and make sure she understands the equity erosion as the balance compounds even though the drawdowns aren't counted as income for her pension. The HEAS is cleanly better here: no fees, lower rate, simpler administration, structured exactly for her cash-flow need.

Niko, 78, owns his $1.4 million home outright. He needs to fund a $280,000 refundable accommodation deposit (RAD) to move into a residential aged-care facility, plus a buffer of around $40,000 for setup and contingencies — about $320,000 in total. On these facts, the HEAS lump-sum limits cannot provide the full amount, so his realistic option is a commercial reverse mortgage of about $320,000, secured against his home (an LVR of roughly 23%, which sits comfortably within typical commercial limits for his age) (MoneySmart, https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release). The rate impact has to be modelled honestly: at 8% compounding over, say, eight years (a representative residential-care period), the $320,000 balance grows to roughly $590,000, and if the home appreciates moderately to perhaps $1.7–1.8 million, the estate's net equity is around $1.1–1.2 million. On these facts it is generally rational to use the commercial product to fit the size of the need the HEAS can't, but to make sure Niko and his family understand the equity erosion transparently, to check whether the home will retain a protected-person or two-year aged-care exemption, to weigh whether simply selling the home to fund the RAD would be cleaner than borrowing against it, and to confirm the RAD-versus-daily-accommodation-payment decision has been independently assessed. The reverse mortgage may still be the right answer — but it should be a deliberate choice with the alternatives modelled, not the first option grabbed.

For retirees considering releasing equity from their home, the headline message is to always check HEAS eligibility first. Since the 2022 expansion, the HEAS is open to most retirees of Age Pension age regardless of whether they actually receive the pension, and the rate gap with commercial products is substantial enough to dominate the economics over any meaningful holding period. The work is to identify the cash-flow shape actually needed (small supplement points to the HEAS; large lump sum may need a commercial product), to model the compounding curve under each over 10, 15, and 20 years so the equity erosion is understood before committing, to integrate with the Centrelink position (lump sums held as cash become assessable; lump sums spent on the exempt home don't), to consider the alternatives — downsizing with a downsizer contribution, the exempt-home conversion strategy, family arrangements — before defaulting to equity release at all, and to ensure independent legal advice is obtained (mandatory for commercial products, sensible for the HEAS). The headline most people need to hear early is the one their broker probably won't lead with: for most retirees most of the time, the HEAS is materially cheaper, and the question is whether your specific need fits its structure. The commercial rates and caps move with the market and policy, so confirm the current HEAS rate, commercial rates, and HEAS limits before relying on them — but the shape of the comparison is durable.

Sources

• Services Australia — Home Equity Access Scheme
• MoneySmart — Reverse mortgage and home equity release
• ATO — Downsizer super contributions