Reverse mortgages aren’t like typical mortgages. They are often used as a way for people to pay for their retirement when they haven’t saved enough money for it. If you’re approaching your planned retirement date and haven’t saved as much as you need, this may be something you’re considering.
But are reverse mortgages a lifesaver or risky business? For many people, there are distinct advantages for costly retirement years. But there are also some downsides—it’s a substantial amount of debt that you are signing up for.
Keep reading and we’ll walk you through the main pros and cons below.
For people who need extra cash later in life, a reverse mortgage allows you to get money from your home equity without having to sell your home.
A reverse mortgage is essentially what it sounds like. In a normal mortgage, you make payments to a bank or mortgage lending company who lent you money to buy a home. In a reverse mortgage, the lender pays you for the home you already own, much like a refinancing agreement.
How much can you borrow in a reverse mortgage? You can borrow up to 55% of the current value of your home, based on a few conditions such as your age, the value your home, and the lending company you choose.
As for repayment, you are not required to pay back the loan until you move out of your house, sell it or when the last borrower on your house title dies.
You will owe more interest though the longer you go without making payments if that’s the route you choose.
Other payment options are available depending on what company you get the reverse mortgage from. These can include choosing to make payments on the interest only or paying amounts that cover both interest rate and some of the principal of the loan as well.
In order to qualify for a reverse mortgage in Canada, you must be a homeowner over 55 years old. On your application you must also include the names of everyone listed on your home’s title, who must also be at least 55 years old.
Other factors will also be considered when approving you for a reverse mortgage. These include:
The home you’re refinancing with a reverse mortgage must also be your primary residence, meaning you live there at least six months of the year. You can’t simply use your cottage property for a reverse mortgage while continuing to live somewhere else most of the year.
You and the other people listed on the title of the home may also be asked to get independent legal advice by the lender. You may then be required to provide proof of this legal advice to the lender.
The most obvious advantage of getting a reverse mortgage is that you get some much-needed cash for retirement.
Life is full of unexpected surprises and many people find themselves approaching their planned retirement date without having enough savings.
A reverse mortgage can also allow you to finance other expenditures, from home repairs to helping family members. There are no restrictions on how you use the funds.
You also don’t need to make regular payments unless you want to. The cash you get as part of the reverse mortgage will also not affect any Old-Age Security or Guaranteed Income Supplement benefits that you receive.
Another important advantage of the reverse mortgages is that you do not have to pay any tax on the money that you receive from your reverse mortgage.
Your mortgage amount is always tied to the value of the home at appraisal. This means that if there is a correction in real estate prices—which is on the horizon according to experts—you are not responsible for the shortfall if and when your home is sold. The lender would be responsible for any shortfall. However, you will benefit if the value of the home increases. The profit goes to you, the homeowner, and not the lender.
The fact that reverse mortgages are non-recourse loans is the main reason why their interest rates are higher than a normal mortgage loan which are recourse loans.
The saying “if it seems too good to be true, then it probably is” can sometimes apply to reverse mortgages. Firstly, it’s a loan and not free cash. The interest payment on reverse mortgages is also significantly higher than you would pay on an average mortgage. Interest rates above 5% are basically the norm for this type of financial product.
Having a reverse mortgage will affect how much money is leftover for your children. The money will need to be repaid upon the death of everyone who is part of the loan agreement. If your heirs are your children, this will affect them and should be taken into account for succession planning.
Your children will likely have to sell the home in order to pay back the money you received as part of the reverse mortgage, plus interest.
In order for your children to keep the house they would have to buy it themselves, while paying off the reverse mortgage with their own funds.
A last option is the deed in lieu of foreclosure, where your children hand over the deed of the home to the lender. The lender then sells the home to recoup the loan.
When it comes to succession planning you may want to talk to your kids about the reverse mortgage and the consequences it could mean for them if you were to pursue one.
There’s also somewhat of a lack of choice in Canada, which means that it is hard to shop around for the best deal. There are only two lenders that offer reverse mortgages in Canada, HomeEquity Bank offers the Canadian Home Income Plan (CHIP), and Equitable Bank, which offers reverse mortgages in some major urban areas. It may be possible that your bank offers better options, such as a personal loan or a line of credit, that better suit your situation.
If you pass away before the loan is paid back, the estate will be responsible for repayment. If you have children who choose to sell your house after your passing, they will be responsible for handing back the balance of the loan plus interest to the lending company.
If you are a co-borrower and your spouse dies, the terms of the reverse mortgage remain the same. However, after the borrowers’ death, the full amount must be repaid with interest. The repayment period of the loan will be set by your lender.
A reverse mortgage can be a way to quickly increase the amount of money you have on hand for your retirement, but it can also help pay for other expenses, which may include paying down debt.
But if you use a reverse mortgage to help lower your debts, you are likely diverting funds from their intended use, which is a long and happy retirement.
Everyone’s circumstances are different though and deciding on a reverse mortgage can be difficult.
A Licensed Insolvency Trustee (LIT) can help you weigh your options and help you decide how you manage your home equity and debts.
There may be many options you’re not aware of. For example, a formal debt solution, like a consumer proposal, would allow you to renegotiate and lower your unsecured debts without any impact on your assets, like your home. A consumer proposal can lower you debts significantly, usually between 30-80 percent.
If debts are a part of the reason why you are looking to supplement your retirement savings, talk to an LIT, who can assess your debt levels, go over your debt relief options and point you in the right direction.
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