Reverse Mortgages: What Seniors Need to KnowJan 30, 2018
Canada now has some competition in the reverse mortgage space. After seeing the successful growth of the CHIP Reverse Mortgage, which had a 35 per cent increase in demand last year, Equitable Bank has entered the game with the PATH Home Plan. Both of these products target Canadian homeowners over 55, although PATH has yet to receive any endorsements from figure skaters.
A reverse mortgage is a loan that lets you borrow a certain amount of your home equity, which is the value of your home minus any mortgage or tax debt that you owe. (Here’s an example of how to calculate home equity.) The biggest difference between PATH and CHIP is that the former lets you borrow up to 40 per cent of your home equity, depending on your age, while the latter lets you borrow up to 55 per cent. In any case, it’s best not to borrow up to your maximum limit.This is the biggest difference between Canada’s two reverse mortgage options. Click To Tweet
Beware of higher interest rates
Although five-year fixed mortgage rates as low as 3.5 per cent are currently available at most of Canada’s major banks, both CHIP and PATH charge a much higher rate of 5.99 per cent. And with the Bank of Canada as well as major lenders raising their interest rates recently, reverse mortgage rates might rise sometime in the near future. But for the moment, if you were to borrow $20,000 on a reverse mortgage you would owe an extra $1,200 at the end of the year, if you don’t make any payments before then.
Here’s the biggest danger of reverse mortgages
Unlike a home equity line of credit (HELOC), which requires you to make at least the interest payments on a monthly basis, you do not have to repay a reverse mortgage until you sell your home. The thing to keep in mind is that these loans are not interest-free. So, while you may have borrowed $20-thousand initially, it will have six per cent interest added every year for the next five years—meaning you will end up owing closer to $28-thousand when you sell your home.
Now, depending on where you live, and how much you borrow, this is still likely a small fraction of the sale price. But it can certainly chip away at the proceeds, as you’ll have to subtract that expense from money that could otherwise go toward a future home purchase…or your retirement savings. Your best bet would be to start repaying the loan before you sell your home, even though you don’t have to. Better yet, build up an emergency fund so you won’t need a loan to cover an unexpected expense.
Check out this blog post for tips to start building your emergency fund.