Time to read : 4 Minutes
If you own your home and are struggling with the cost of living crisis… or perhaps you’d like to access a chunk of cash, a reverse mortgage could be the answer to your money woes.
This financial tool lets you tap into the equity of your property without selling it outright or making immediate repayments.
But many people don’t realise that a reverse mortgage could also be taken out on an investment property – not just on an owner occupied home.
Let’s take a closer look at reverse mortgages for investment properties, if you’re eligible, plus the tax breaks and benefits.
What is a reverse mortgage, and why should you care?
A reverse mortgage is a loan that allows you to access the equity in your property as cash. Unlike traditional loans, you don’t make regular repayments. With a reverse mortgage the loan is repaid when your property is sold.
Think of it as turning your bricks and mortar into money – which can be received as a lump sum, or as a regular monthly income stream, much like your rental income.
Who’s eligible for a reverse mortgage?
To qualify for a reverse mortgage, you’ll need to meet this criteria:
You must be at least 55 years old.
You must own your property outright, or have a small remaining mortgage balance that can be covered by your new loan.
Your home must meet certain property standards (most lenders prefer stable properties in urban or suburban areas).
Note: some lenders may have additional requirements, but these are the most common eligibility requirements across Australia.
Can I get a reverse mortgage on my investment property?
While reverse mortgages are usually restricted to owner occupied homes, more lenders are starting to offer them on investment properties as well.
It used to be a requirement that you must live in the property but some lenders have begun to relax this restriction. It’s now possible to qualify for a reverse mortgage on an investment property that rents well.
For investors, it can be a game-changer. You get the funds to reinvest, cover unexpected costs, or even upgrade your property portfolio, all while holding onto your existing assets.
Will a reverse mortgage on your investment property affect the way your rental income is taxed?
It can do. This very much depends on your personal income tax situation and how you have structured your investment property finance to start with.
Usually, your reverse mortgage payment isn’t considered taxable income, unless you use those funds to generate other income, such as:
buying shares that pay dividends
investing in a business that pays you a benefit
purchasing another property.
One of the tax benefits property investors usually enjoy is deducting their interest payments off their rental income.
A reverse mortgage does not require you to make repayments – until the property is no longer yours – so this deduction may be treated differently at tax time. For example, you may find the accrued interest is deductible at a later date.
Important: have a conversation with your financial advisor and your reverse mortgage broker before making any decisions.
What can you use your reverse mortgage funds for?
You can use your funds for anything you like.
For example, let’s say you unlock $200,000 from your investment property. You can use that money to:
renovate your own home or your investment property
pay off other debts, or the fun stuff...
fund a holiday.
Since this isn’t classified as income you’re not upping your tax bracket or complicating your annual return – unless you use your money to generate further income (see the note above).
For instance, if your $200,000 reverse mortgage comes with a 5% annual interest rate and you use these funds to purchase a rental property, you could deduct $10,000 in interest expenses from your taxable income. Over time, this could lead to significant tax savings.
Financial flexibility
Reverse mortgages also allow you to maintain ownership of your investment property while accessing its equity. This means you continue to benefit from your rental income, property appreciation, and any other perks of holding your asset.
Bottom line
A reverse mortgage on an investment property can provide you with access to ready cash, potential deductions, and the flexibility to enjoy your retirement while retaining ownership of your asset.
Be aware of the tax implications before you go ahead though, and check this thoroughly with your financial advisor.
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Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
