Changes to the age pension assets test have left many retirees looking for alternative sources of income  to fund their retirement.

On 1 January 2017, the assets test limit for part age pension rates dropped to $542,500 (from 793,750) for singles, and $816,000 (from approximately $1.1 million) for couples; and the taper rate doubled to $3 per $1000 a fortnight.

While some retirees have benefited from these changes, many have or will suffer, prompting a vast majority of retirees to consider other sources of income to continue living comfortably in retirement.

An appealing option for asset-rich, cash-poor retirees i.e. older homeowners with little income – is to take out a reverse mortgage.

A reverse mortgage allows retirees to access money without having to sell their house. It is  a type of home loan that allows the homeowner to borrow money using equity in their home as security. The home loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.

Just like a normal loan, interest is charged on a reverse mortgage. However, borrowers don’t have to make repayments while they continue to live in their home. Instead, the interest compounds over time and is then added to the loan balance.

If the borrower passes away, moves into aged care, or the time has simply come to sell the home, the loan (including interest and fees) must be paid in full.

Similar to most strategies concerning finances and wealth, there are risks associated with reverse mortgages that shouldn’t be underestimated.

The decision to take out a reverse mortgage should be based on interest rates, fees and features, legal, establishment and ongoing costs and homeowner obligations.

Interest rates for reverse mortgages are generally higher than average home loans and can vary between providers. The amount that can be borrowed also varies. For example, those who are 60 years of age can generally borrow 15 to 20 per cent of the value of their home. This usually rises by 1 per cent for each year older than 60.