Reverse mortgages are outstanding for providing peace of mind, especially to retired homeowners who live on a fixed income.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan for homeowners available to those 55 years old or older.
It allows you to convert a part of your home equity into tax-free income by borrowing from it. You do this without selling your home, and you are usually allowed to borrow a maximum of 55% of the current appraised value of your home.
It is in “reverse” because it takes away from your home equity rather than adding to it.
Retirees often choose this option because acquiring funds can be more difficult once they retire, especially if they don’t want to sell their homes or use their long-term investments.
Borrowing money from your home equity does not impact the amount of benefits you will receive from the Old Age Security (OAS) or the Guaranteed Income Supplement (GIS) provided by the government. The Canadian government also has details on the topic.
The amount you can borrow is based on:
- Your age and the age of anyone else listed on the title of your house (minimum 55 years old)
- The condition of your house, the type, and the appraised value of at least $200,000
- The institution you are lending from
Another primary eligibility qualification is that you must be using that house as a primary resident, meaning you need to be actively living there for a minimum of 6 months.
How Reverse Mortgages are Received
The amount you can receive from your reverse mortgage can be either the whole amount, a more significant sum at the beginning with smaller payments made later or a regular set amount of payments. After researching or talking to a financial professional, see how much you will qualify for.
While a reverse mortgage can be a solution for retirement income, make sure you understand it and the options you may have.
No Negative Equity
Most reverse mortgages have a no-negative equity policy that says you will never owe more than the value of your house as long as you follow your mortgage contract. Because of the competitiveness of the housing market in Canada, it is unlikely that your home would ever lose long-term value. Even if, for whatever reason, your house loses more value than what you owe, the lender may help with the difference.
Entire Amount
You receive the whole reverse mortgage amount in one shot and pay interest on the entire amount. If you do not need the money right away, it may be unnecessary to receive the total amount because it can be expensive.
Savvy investors may like this but it’s a big risk to think you can beat the interest rate. Think twice, and run the numbers based on your experience with investing.
Large Sum Start-Up and Regular Payments
Sometimes, you can take out a minimum amount of your reverse mortgage upfront and the rest on a regular payment basis. Regular payments may include an interest fee, and the rates may change throughout your reverse mortgage.
This may increase the cost of your reverse mortgage as well since you are getting a large sum upfront.
Regular Payments
With regular payments, you receive part of your reverse mortgage regularly, usually every month or every few months. There may be an initial withdrawal fee though.
This implies you are working against a budget since you can only use the money you get and not a penny more.
How Much Does a Reverse Mortgage Cost?
It is essential to consider that the interest rate on your reverse mortgage tends to be higher than the interest rate on your mortgage or home equity line of credit (HELOC). The higher interest cost will add to your reverse mortgage, meaning you will have to pay more in the long run.
Other added costs to a reverse mortgage:
- Appraisal fee.
- Set-up fee.
- Paying off your reverse mortgage before it is due will incur penalties for prepaying.
- Legal fees.
- How you receive your payments will impact fees.
The fees and rates often depend on your lender, and when you choose to pay may also depend on your lender, so discuss your options with a professional.
Alternative Options
It is essential to understand that a reverse mortgage does leave you with extra costs, so understand all of your options! It’s almost like a last resort to stay in your home as long as you can.
Other options for making extra money for retirement include selling your current house. If it was the family house and the kids have moved out, buying a smaller home, renting, or going into assisted housing might be good options.
If you wish to keep the family house, it’s understandable! You could always get a loan, such as a line of credit or personal loan. Your financial institution will likely have options that fit your needs, or you could search for other options with lower interest rates.
- Downsizing or selling your house.
- Selling investments.
- Becoming a landlord by renting your home.
- Apply for a Home Equity Line Of Credit (HELOC) or a home equity loan.
Paying Your Reverse Mortgage Back
One of the highlights of a reverse mortgage is that you do not need to make regular payments to pay it back. However, you can only repay a maximum amount at a given time, and there could be a fee if you pay it off early. Just like a mortgage, pre-payments are limited.
Your specific terms will be based on the financial institution to which you choose to get a reverse mortgage. The time frame to pay back the reverse mortgage will also be based on lenders and the consequences if you do not pay it back within that timeframe.
The requirements to repay the reverse mortgage are when you sell your house or move out of your home, the person who borrowed last passes away, and you default on the reverse mortgage.
What it Means to Default on Your Reverse Mortgage
Defaulting on your reverse mortgage has profound consequences, including the foreclosure of your home.
Reasons why you would have to default on your reverse mortgage, include using the funds for illegal reasons, lying on your reverse mortgage application, neglecting the care of your home to lower its value and not following the conditions of your reverse mortgage contract. These are the more common criteria among financial institutions, but it would depend on your.
What to Use Your Reverse Mortgage On!
You may be wondering why people get reverse mortgages and what they use that money for. Well, it’s simple! Similar to a personal loan, you can use it for what you want! More common uses are home repairs, bills, healthcare expenses, and debts.
There may be restrictions based on who you choose to bank with or which institution you work with on your reverse mortgage.
Who Offers Reverse Mortgages
You can get a reverse mortgage from most financial institutions in Canada. However, there are also financial institutions regulated by the federal and provincial governments and mortgage brokers. This means there might be differing rules and regulations regarding individual financial institutions.
The leading lenders in Canada are the HomeEquity Bank and the Equitable Bank. These are federally registered financial institutions; although they are a common choice, they do not have any physical branches to visit.
Home equity reverse mortgages are offered through many Canadian banks, credit unions, mortgage brokers, and financial planners.
Types of Reverse Mortgages
Like regular mortgages, reverse mortgages also have different types and options from which to choose.
You have to choose between an open or closed mortgage agreement with a variable or fixed mortgage rate. After all, it’s a loan from which you have concluded to sell your house to cover the loan down the line.
The CHIP Reverse Mortgage is the oldest and most commonly used reverse mortgage plan offered by HomeEquity Banks. CHIP stands for the Canadian Home Income Plan.
Pros & Cons of a Reverse Mortgage
A reverse mortgage is often for those with no cash flow options who cannot afford the necessary living expenses.
To qualify for a reverse mortgage, you normally have to be able to maintain your properties, make regular payments that will include interest and plan on living in your current home.
Reverse mortgages are not meant for those having difficulty maintaining their home, wishing to leave at some point to stay with family or benefit more from selling the house so you can keep 100% of the profits.
| PROS | CONS |
|---|---|
| Additional monthly income. | Higher interest rates than other loans. |
| No regular payments. | Initial setup fees. |
| No negative equity. | Limit future financing options that are usually secured by owning your home. |
| You still own your home while turning some of its value into cash. | May have to pay off all other forms of debt, including credit cards and loans. |
| You have options on when and how you want the money. | The equity of your house may reduce with the accumulation of interest. |
| No taxes on the money borrowed. | If you pass away, your home may have to be used to pay off the reverse mortgage and its interest. |
| Does not affect your OAS or GIS benefits. | You may not be allowed to pay off your reverse mortgage whenever you want; your lender will dictate the terms. |
Should You Get A Reverse Mortgage?
As much as you want to increase your monthly retirement income, you may need legal advice to get a reverse mortgage in some provinces. You should also consult a professional financial advisor to help you understand the costs and their impact on your home equity and estate.
Figuring out the ins and outs of a reverse mortgage is not easy, and it is highly recommended that you talk to a trusted professional financial advisor before signing any contracts. There are scammers out there, and with the reverse mortgage’s complexity, it could be easy to get caught up in one of those scams. Talk to your financial advisor today about reverse mortgages!