Everything You Need to Know About Reverse Mortgages
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How Canadians Over 55 Could Benefit From a Reverse Mortgage
You’ve probably seen commercials on TV advertising ‘reverse mortgages’ to Canadians in their late 50s or older. What exactly is a reverse mortgage, though, and is the loan all it’s cracked up to be?
Read below to learn how a reverse mortgage could benefit you, and what drawbacks you should be aware of.
What is a Reverse Mortgage?
As the name suggests, a reverse mortgage creates an opportunity to receive payments from a lender, as opposed to a mortgage in which the borrower would pay their lender. Here’s how it works:
Homeowners over the age of 55 might apply for a reverse mortgage as a way to withdraw funds from their home equity without having to sell their home. Usually, you can borrow up to half of your home equity.
Home equity refers to the portion of your home that you ‘own’ in a financial sense. You can determine this value by subtracting the amount you still owe towards your mortgage from your home’s current value.
A reverse mortgage allows you to turn your home equity into cash without having to make a set of payments until the loan is due – this occurs when the home is left or sold, or the mortgage holder passes away.
This option is popular among homeowners who want to have extra cash for their retirement, to pay off other debt, or cover any lifestyle expenses.
How Does it Differ From a Home Equity Loan or Home Equity Line of Credit?
Reverse mortgages, home equity loans, and home equity lines of credit all allow you to tap into your equity, though the circumstances of each decision are different.
With a home equity loan, the borrower receives a lump sum of money from their equity. In return, the borrower must make fixed payments towards their loan over time.
Home equity lines of credit (often shortened to HELOC) are slightly different from home equity loans. The borrower is given a line of credit that they can withdraw funds from as needed. These have a borrow limit and a variable interest rate. At minimum, you must pay the interest accruing each month.
Reverse Mortgage Eligibility
You will need to apply and get approved for a reverse mortgage. To do this, you must be at least 55 years old, and a homeowner. If you are married, your spouse must also be at least 55 years of age.
Your lender may also ask you for other documents before approving your reverse mortgage – for example, they will ask that you receive independent legal advice.
The amount you are allowed to borrow may change based on factors like your age or your home’s current value – ask your lender for more details.
Benefits of a Reverse Mortgage
You Can Turn Home Equity into Cash
Many mature homeowners wish they had the ability to access their home equity for a number of reasons – to fund their retirement, to travel, to help their family, or to pay off other debts, for example. Reverse mortgages make this option possible – and you’ll still be able to live in your home.
You Won’t Need to Make Mortgage Payments
Unlike other loans, reverse mortgages don’t require the borrower to make fixed payments back. Instead, the borrower can wait until they sell their home to repay the money.
It’s Easy to Qualify
Getting approved for most types of loans can be difficult at any age. Fortunately, the application process for reverse mortgages is easy, and only requires a short list of criteria.
Reverse Mortgages are Tax-Free
Whether you choose to receive your funds in a lump sum or spread out over time, you’ll rest assured that your payments are free from tax.
Why a Reverse Mortgage May Not Be Your Best Option
Reverse mortgages are beneficial for many Canadians – but some homeowners are unaware that there are consequences from this type of loan. Learn about these before applying.
Higher Interest Rates
Reverse mortgage rates often have higher interest rates than mortgages. It’s easy to overlook the higher interest since you won’t have to pay the loan unless you sell far into the future.
Other Fees
There are a handful of additional setup costs that can add up quickly when getting approved for a reverse mortgage. For example, you may have to pay a home appraisal fee, an application fee, and fees towards independent legal advisors. These can all be deducted from the first draw of funds you receive from your new reverse mortgage.
Penalties
If you sell your home or pass away within three years of the beginning of your reverse mortgage, a penalty fee may be added.
Your Equity is Affected
As a home owner, your equity is important. It’s the part of your home that you actually ‘own.’ Dipping into your home equity for any reason can change the status of your equity position, so it should only be done if you are certain that it will benefit you.
Conclusion
Ultimately, a reverse mortgage is a decision that you should make carefully. The loan can provide plenty of benefits and drawbacks – it may be a smart, resourceful way to get extra cash if you accept the impact it will have.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.