Reverse Mortgage and the Age Pension: How Drawing Equity Affects Your Payment
Your family home is exempt from the Age Pension assets test no matter what it's worth. But the moment you turn that equity into cash with a reverse mortgage, the rules flip: the cash you draw becomes an assessable financial asset, it gets deemed to earn income, and it can cut your pension. The trick is in how — and how fast — you spend it.
This guide walks through exactly what happens when you draw equity from your home, using a real worked example of a $100,000 lump sum. We'll also look at the government's own reverse mortgage — the Home Equity Access Scheme (HEAS) — which is treated very differently and is often the smarter option for pensioners.
Why the home is exempt but the cash isn't
Under the Age Pension means test, your principal home is an exempt asset — Services Australia does not count its value at all, regardless of whether it's worth $400,000 or $4 million. That exemption is the foundation of the whole strategy people are reaching for when they consider a reverse mortgage: it feels like you're tapping a tax-free, pension-free pool of money.
The problem is that the exemption attaches to the home, not to the equity once it leaves the home. When a lender advances you cash against the property, that cash is now a separate, countable asset — usually cash in the bank, which is a financial asset. Financial assets are caught by two tests at once:
- The assets test — the dollar value of the cash is added to your assessable assets.
- The income test — that same cash is run through the deeming rules, which assume it earns a set rate of income whether it actually does or not.
Services Australia confirms the home stays exempt, but it also confirms that the loan proceeds are assessed. Importantly, the reverse mortgage debt is not netted against your other assets — you can't reduce your assessable cash by the amount you still owe the lender, because the debt is secured against the exempt home, not against the cash.
Deeming: the part most people miss
Deeming is where a reverse mortgage quietly bites. Rather than tracking the actual interest your money earns, Services Australia deems all of your financial assets to earn a fixed return, and counts that deemed amount under the income test. As at the rates effective from 20 March 2026:
| Deeming tier | Single | Couple (combined, at least one pensioner) | Rate |
|---|---|---|---|
| Lower tier (first slice) | First $64,200 | First $106,200 | 1.25% |
| Upper tier (the rest) | Above $64,200 | Above $106,200 | 3.25% |
Source: Services Australia — Deeming (Age Pension). Deeming rates and thresholds are reviewed periodically; always confirm the current figures before acting.
The key insight: deeming applies to all your financial assets pooled together. If you already have other savings or super in the account-based pension phase, the new lump sum likely stacks on top of your existing balance and is deemed at the upper 3.25% rate, not the gentle 1.25% lower rate.
Worked example: drawing $100,000 as a lump sum
Meet Brian, 71, single, full homeowner. His house is worth $850,000 (exempt). His other assessable assets are $250,000 — a $120,000 super account-based pension plus $130,000 in the bank. On those numbers he's under the single-homeowner asset free area of $321,500 and is receiving close to the full Age Pension.
Brian takes a $100,000 commercial reverse mortgage lump sum to renovate and keep some cash buffer, and parks it in his savings account while he decides what to do.
Step 1 — Assets test. His assessable assets jump from $250,000 to $350,000. That now exceeds the single-homeowner full-pension threshold of $321,500 by $28,500. The assets test reduces the pension by $3 per fortnight for every $1,000 over the threshold:
- $28,500 ÷ $1,000 = 28.5 increments
- 28.5 × $3 = $85.50 less per fortnight under the assets test (about $2,223 a year).
Step 2 — Income test (deeming). Brian's total financial assets are now $350,000 (super + bank + the new cash; the renovation hasn't happened yet). Deemed income:
- First $64,200 × 1.25% = $802.50/yr
- Remaining $285,800 × 3.25% = $9,288.50/yr
- Total deemed income ≈ $10,091/yr (about $388/fortnight)
Before the draw, his $250,000 was deemed at roughly $6,841/yr. So the $100,000 added about $3,250 a year of deemed income — even though the cash is just sitting there earning bank interest.
Step 3 — which test wins? Services Australia applies whichever test produces the lower pension. After the draw, Brian's assets-test reduction and his income-test reduction both grow. In his case the assets test is the binding test, so he loses around $85.50 a fortnight — and the $100,000 he borrowed is also accruing reverse-mortgage interest at the lender's rate the whole time. He's paying interest on money that is simultaneously shrinking his pension.
The lesson isn't "never draw equity." It's that an idle lump sum is the worst of both worlds — assessed as an asset, deemed as income, and compounding lender interest. What you do with the money next changes everything.
Spent within the year vs held as cash: a real difference
Here's the nuance that good planning turns on. A lump sum is only assessable while it remains an assessable asset. If Brian spends the $100,000 on something that is exempt or non-assessable, the assessment falls away.
| What Brian does with the $100,000 | Assets-test effect | Income-test (deeming) effect |
|---|---|---|
| Leaves it in the bank as cash | Counted in full ($100k added) | Deemed in full |
| Spends it renovating the exempt home | Disappears — improvements roll into the exempt home | No longer deemed (it's gone) |
| Buys a new car / caravan / furniture | Counted at second-hand (garage-sale) value, usually far below purchase price | Not a financial asset, so not deemed |
| Gifts it to the kids | Caught by gifting rules — see below | Deemed for 5 years under gifting rules |
Spending on the home itself is the cleanest: a $100,000 bathroom-and-kitchen renovation converts assessable cash into value inside the exempt asset, so it drops out of both tests entirely. Buying depreciating personal assets (a car, white goods) also helps because Services Australia values them at what you'd actually get for them second-hand — often 20–40% of what you paid — not the sticker price.
So "spent within the year" vs "held as cash" isn't quite the right framing — it's what you spend it on, not just when. Money spent on the exempt home or genuinely consumed reduces your assessable position; money parked in the bank, in shares, or in another investment keeps being assessed and deemed indefinitely.
The Home Equity Access Scheme: the government's own reverse mortgage
Before signing a commercial reverse mortgage, almost every age pensioner should look at the Home Equity Access Scheme (HEAS) — a government-run reverse mortgage offered through Services Australia. It is usually cheaper and is assessed far more gently.
- Interest rate: a compound annual rate of 3.95%, calculated and added to the loan balance each fortnight. That is materially below typical commercial reverse-mortgage rates.
- How you receive it: as a regular fortnightly payment (up to a capped amount), or as one or two lump-sum "advance payments" each year, or a mix.
- Means-test treatment of the fortnightly stream: the regular HEAS top-up is a loan against your home, not income — so it is not assessed under the income test and does not reduce your Age Pension when taken as a fortnightly payment.
Source: Services Australia — Home Equity Access Scheme and HEAS interest rate.
| Feature | Commercial reverse mortgage | Home Equity Access Scheme (HEAS) |
|---|---|---|
| Interest rate | Commercial (typically higher) | 3.95% p.a., compounded fortnightly |
| Default payout shape | Lump sum | Fortnightly stream (lump-sum advances available, capped) |
| Means-test hit on a fortnightly stream | Cash builds up → assessed + deemed | Not assessed as income; pension unaffected |
| Lump sum sitting in the bank | Assessed + deemed | Also assessed + deemed (a HEAS advance is still cash) |
| Who runs it | Banks / specialist lenders | Services Australia (Australian Government) |
The big takeaway: HEAS taken as a fortnightly top-up sidesteps the deeming problem entirely, because there's never a big cash lump building up in your account to assess. A commercial lump sum, by contrast, lands as assessable cash on day one. For income smoothing, the government scheme is almost always the gentler tool on your pension.
One caveat both schemes share: if you take a HEAS advance payment (a lump sum) and let it pile up in the bank, it is assessed just like any other cash. The advantage only holds while the money flows as a stream and gets spent.
Interaction with Rent Assistance and homeowner status
This is the part that catches people who are thinking about selling later. Rent Assistance is a supplement paid to pensioners who rent their home — and you can only get it if you are not a homeowner. A homeowner living in their own home is an "ineligible homeowner" for Rent Assistance.
A reverse mortgage doesn't change your homeowner status — you still own and live in the home, so a reverse mortgage neither qualifies you for Rent Assistance nor costs you anything on that front. But two related moves do matter:
- Selling the home to rent instead. Once you sell, you become a non-homeowner. That gives you a higher asset free area — $579,500 for a single non-homeowner vs $321,500 for a homeowner (the difference is the "extra allowable amount") — and you may now qualify for Rent Assistance. But the entire sale proceeds become assessable cash and are deemed, which usually wipes out the gain unless you're spending down.
- The 24-month home-sale exemption. If you sell intending to buy or build a new home, the portion of the proceeds you plan to use is asset-exempt for up to 24 months and deemed only at the lower 1.25% rate. A reverse mortgage gives you none of these concessions, because you're not selling.
Source: Services Australia — Who can get Rent Assistance and Assets test for Age Pension.
| Asset free area (full pension), from 20 March 2026 | Homeowner | Non-homeowner |
|---|---|---|
| Single | $321,500 | $579,500 |
| Couple (combined) | $481,500 | $739,500 |
Source: Services Australia / Department of Social Services thresholds effective 20 March 2026 – 19 September 2026, via Assets test for Age Pension.
- The home is exempt; the cash you draw is not. A reverse mortgage lump sum becomes an assessable financial asset the moment it lands in your account.
- You get hit twice. The cash counts under the assets test and is deemed under the income test — and the reverse-mortgage debt can't be offset against your other assets.
- Idle cash is the worst case. In our example, an unspent $100,000 cost Brian about $85.50/fortnight in pension while also accruing lender interest.
- What you spend it on matters more than when. Money put into the exempt home or genuinely consumed drops out of the tests; money gifted away keeps being assessed for five years.
- Look at the HEAS first. The government scheme charges 3.95% p.a. and, taken as a fortnightly stream, is not assessed as income — so it usually beats a commercial lump sum on your pension.
- A reverse mortgage doesn't unlock Rent Assistance. You're still a homeowner; only selling changes that — and selling turns the proceeds into assessable cash.
Frequently asked questions
Does taking a reverse mortgage reduce my Age Pension?
It can. The home stays exempt, but any cash you draw becomes an assessable financial asset and is also deemed to earn income. If the cash pushes your assessable assets over your threshold, or adds enough deemed income, your pension is reduced under whichever test produces the lower payment. The pension is unaffected only to the extent the money is spent on exempt things (like improving the home) or never builds up as a lump sum.
Is the reverse mortgage debt subtracted from my assets?
No. Because the loan is secured against your exempt home rather than against the cash, Services Australia does not net the outstanding debt against your other assessable assets. You're assessed on the full cash you hold, even though you owe it back to the lender with interest.
How is the Home Equity Access Scheme treated differently?
The HEAS is a government reverse mortgage charging 3.95% per year, compounded fortnightly. When you take it as a regular fortnightly payment, that stream is treated as a loan against your home, not as income — so it is not assessed under the income test and doesn't cut your pension. The advantage disappears if you take it as a lump-sum advance and let it accumulate in the bank, since that cash is then assessed like any other.
If I spend the lump sum quickly, does the assessment go away?
It depends on what you spend it on, not just how fast. Spending on your exempt principal home (renovations, repairs) makes the money drop out of both tests. Buying depreciating personal items helps because they're valued at low second-hand prices. But if you gift the money, it keeps counting as your asset and is deemed for five years beyond the $10,000-a-year / $30,000-over-five-years gifting limits.
Can a reverse mortgage qualify me for Rent Assistance?
No. Rent Assistance is only for non-homeowners who pay rent. A reverse mortgage keeps you as a homeowner living in your own home, so you remain ineligible. Only selling the home and renting would change your homeowner status — but that converts the sale proceeds into assessable, deemed cash.
Should I use a commercial reverse mortgage or the HEAS?
For most age pensioners wanting an income top-up, the HEAS is usually the better starting point: it's cheaper (3.95% vs typical commercial rates) and a fortnightly HEAS stream isn't assessed as income. A commercial lump sum may suit a one-off large expense, but it lands as assessable cash and can reduce your pension. This is general information — run your own numbers with a financial planner or a free Services Australia Financial Information Service officer before deciding.
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