Turning Gearing Into Freedom: Lines of Credit and Reverse Mortgages

Many pre‑retirees and downsizers ask whether they should sell geared property outright, or use a line of credit or reverse mortgage as part of their exit plan. In plain terms: a line of credit (LOC) is a flexible, redrawable loan you manage actively; a reverse mortgage is a slower‑moving, capitalising loan that quietly grows while you live in your home. Used carefully, either can turn property equity into retirement cashflow and help unwind gearing without forced sales.

If you’re in your 50s, 60s or early 70s, the key decision this week is not “LOC or reverse mortgage?” but “how do I want to exit gearing over the next 5–10 years?”. The loan structure is just a tool to deliver that plan.

A clear exit roadmap helps you decide where lines of credit and reverse mortgages fit.

1. Where LOCs and reverse mortgages fit in a gearing exit plan

1.1 What a gearing exit plan actually is

A gearing exit plan is a time‑framed path from high leverage to low or no leverage, without blowing up your cashflow or tax position. For most Australians, that means:

1. Reducing or eliminating non‑deductible home debt.
2. Deciding which investment properties to keep, sell, or pass to the next generation.
3. Turning part of your equity into reliable income or buffers for the next 20–30 years.

Negative gearing reforms from 2027 and tighter serviceability rules make it dangerous to just “wing it”. As we’ve shown in /insights/worked-after-tax-cashflow-examples-geared-property-before-after-rule-changes, relying on tax refunds to carry a geared portfolio is much less attractive from the late 2020s.

In that context, LOCs and reverse mortgages are transition tools:

• LOCs: good for short‑to‑medium‑term flexibility and managing uneven cashflows.
• Reverse mortgages: good for long‑term income or lump sums once full‑time work is behind you.

1.2 Quick definitions in plain English

Line of credit (LOC)

• A revolving facility, a bit like a giant credit card secured by property.
• You can draw, repay, redraw, usually up to a limit.
• Interest is charged monthly on what you’ve used.
• Typically has higher rates than a sharp P&I loan, and lenders expect you to manage it actively.

Reverse mortgage

• A loan for over‑60s secured against your home or, in some cases, a holiday house.
• You don’t have to make repayments; interest usually capitalises.
• The debt grows over time and is repaid when you sell, move permanently into care, or your estate sells the property.
• Regulated under National Consumer Credit Protection Act, usually with “no negative equity” guarantees.

For a deeper dive into turning equity into income safely, see /insights/equity-release-retirement-reverse-mortgage-downsizer-alternatives.

1.3 When these tools belong in the conversation

LOCs and reverse mortgages usually make sense if you:

• Are 55+ and property‑heavy, cash‑light.
• Want to keep at least one property (often the home) for lifestyle or estate reasons.
• Expect lower taxable income after retiring, so want to stage sales to manage CGT and Age Pension impacts.
• Need extra buffers while you work through loan restructures, downsizing, or selling one property at a time.

They’re less suitable if:

• You’re already highly stressed on repayments (Roy Morgan’s ‘At Risk’ or ‘Extremely At Risk’ definitions).
• Property values are shaky and LVRs are already high.
• You’re still in your 40s or early 50s with a long runway to simply delever through aggressive principal repayments.

2. Line of credit vs selling an investment: cashflow and control

A common fork in the road is: “Should I sell one investment now, or keep it and open a line of credit?”

2.1 Comparing LOC vs sell: a worked example

Assume:

• Investment unit value: $900,000.
• Loan against it: $450,000 (50% LVR, P&I at 6.5% p.a., 20 years remaining).
• Rent (net of non‑finance costs): $32,000 p.a.
• Your marginal tax rate now: 34.5% (including Medicare).

Option A – Sell now

• Sell price: $900,000.
• Selling costs (agent, legals, etc.): $30,000.
• Net proceeds before CGT and loan payout: $870,000.
• Pay out $450,000 loan → $420,000 gross equity released.

You may have CGT to manage, especially post‑2027 reforms, but you’ve de‑risked your portfolio. That $420,000 can:

• Knock down your home loan.
• Move partly into super (subject to contribution caps and downsizer rules).
• Sit in an offset to fund semi‑retirement.

Option B – Keep property + LOC

You keep the property and set up a separate LOC split against it.

• Conservative LOC limit at, say, 60% LVR: 60% × $900,000 = $540,000.
• Existing loan: $450,000.
• Additional LOC capacity: $90,000.

If you drew the full $90,000 LOC at 7.2% p.a. interest‑only:

• LOC interest: ≈ $6,480 p.a.
• The property still has rent of $32,000 p.a.
• Total interest on both loans maybe ≈ $34,000–$36,000 p.a. (illustrative only).

You’re now negatively geared on this property. With negative gearing benefits reducing for new investments after 12 May 2026 (see /insights/will-tighter-negative-gearing-rules-kill-property-investing-reality-check), using LOCs to fund lifestyle spending can start to look less attractive.

The trade‑off is:

• Control and upside if the property continues to grow.
• Higher risk if rates rise or rents fall, because you’ve just added another moving piece.

2.2 LOC vs sell: summary table

If your stress‑test rule is to keep total property loan repayments under 30–35% of after‑tax income at current rates +3% (see /insights/how-mortgage-brokers-find-sharp-home-loan-rates-without-gimmicks), then an LOC is only sensible if you remain inside that band with the extra debt.

2.3 Good uses of an LOC in an exit plan

LOCs are most powerful when used as a bridge, not a lifestyle credit card:

• Covering costs (CGT, staging, cosmetic works) when preparing a property for sale.
• Funding a short‑term income gap while you reduce hours at work.
• Consolidating small, high‑rate debts under one property‑secured facility you intend to pay down.
• Providing a “just‑in‑case” buffer so you can choose when to sell, instead of being forced by a short‑term cash crunch.

They’re risky when used for:

• Ongoing living expenses with no clear plan to reduce the limit.
• Speculative investing in more property after 2026, ignoring the changed tax rules.
• Helping adult children in ways that quietly consume your retirement buffer (we cover safer approaches in Helping Adult Children While You’re Still Geared within this cluster).