Even though reverse mortgages can help fund a comfortable retirement, retirees should consider all aspects of this potentially life- changing financial decision.

A financial dilemma that is increasingly being shared by Australia’s ageing baby boomer generation is finding a way to fund a comfortable retirement lifestyle, without having to sell the family home.

One solution is a reverse mortgage; a loan that allows homeowners to convert part of the equity in their home into cash. The money can be taken as a regular income stream, line of credit, lump sum, or a combination of these options.

No income is required to qualify for a reverse mortgage, which makes them ideal for those who have retired from the workforce.

However, interest is charged just like any other loan. Since no repayments are made, the interest compounds and is added to the loan balance.

The loan is then repaid in full (including interest and fees) upon the sale of the house, the death of the homeowner, or in most cases, when the borrower moves into aged care.

However, given the nature of this type of loan, it is important that homeowners understand the risks involved, and consider how they can protect themselves as much as possible.

Risks associated with reverse mortgages include:

• The interest rates are usually higher than average home loans

• Debt can rise quickly since the interest compounds over the loan term

• The loan can affect your pension eligibility

• You may not have enough money left for aged care or other future needs

• (For those who finance their interest) the costs to break your agreement can be very high

• If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances)