The potential problems with a reverse mortgage depend upon the financial circumstances of the borrower and the terms of the mortgage selected.

Interest rates for a reverse mortgage are generally higher than those for other mortgages. Because no repayments are made during the life of the loan, interest and fees charged are added to the principal of the loan and accrue additional interest (compounding), much as credit cards do. This means the amount of the loan can rapidly balloon, and more than double in less than ten years.

Although reputable lenders offer a guarantee of no negative equity, this can be breached if other terms of the loan, even seemingly trivial ones, are violated. If this happens, it is possible to be evicted and for the home to be sold to cover the amount of the debt, with the borrower responsible for meeting any shortfall.

Reverse mortgages contain clauses that standard loans don’t carry, including maintaining the property to the standards of the lender. Rates must also be paid on time and insurance carried. Also, the home must be revalued every few years, which is an additional charge added to the balance of the loan and which will accrue interest.

A major consideration is planning for the future. If a reverse mortgage has consumed one’s home equity, then there may not be enough remaining to provide an accommodation bond. At the time of acquiring a reverse mortgage, there is no means of knowing how much of one’s equity will be gone when that time arrives, leaving a large financial question mark dangling over one’s retirement.

There is of course the issue of spending the inheritance one’s children are perhaps expecting, with the familial disappointment that carries.

Without proper management in advance, a reverse mortgage can reduce one’s entitlements. These pitfalls can include gifting large sums of the money received, purchasing a car (which is assessed as an asset), or even taking the cash in a large lump sum rather than using it to generate a constant income stream, which can affect one’s benefits for years.

If one accepts a reverse mortgage with a fixed term, one runs the risk of being faced with repayment of the loan during one’s lifetime, which could entail selling the house and being left without sufficient funds to meet one’s continuing needs.

Using the money for investing purposes would be very risky indeed, as the interest derived from guaranteed investments, such as savings deposits, would not generally exceed the interest rate charged by the mortgage company. Investments without a guarantee, such as stocks or forex speculations, or even starting one’s own business, could quickly consume the capital without generating any income in return, leaving one with a large debt and no further equity upon which to draw.

Before committing to a reverse mortgage, every retiree should discuss the issue, not only with one’s family, but also with an independent solicitor and an independent financial advisor. Both of these professionals should be familiar with one’s actual financial position and not depend upon a mortgage company for their livelihood; as Australian law under certain circumstances allows unlicensed individuals to give financial advice, be choosy as to which advice you take.