A reverse mortgage is a loan that allows you to get money from your home equity without actually having to sell it. Also known as equity release, you can borrow up to 55% of the current value of your home in a reverse mortgage, according to Canada.ca.
The maximum amount you are able to borrow depends on factors such as your age, your home’s appraised value, and your lender. You can pay back your loan when you move out, sell the house or on the death of the last borrower.
This suggests you do not have to make any payments on a reverse mortgage until the loan is due. However, you will owe additional interest on a reverse mortgage the longer you do not make payments which means you will have less equity in your home at the end of your loan term.
The reverse mortgage loan is secured by a residential property and is primarily promoted to older homeowners. As there are no mortgage payments on a reverse mortgage, the interest is added to the loan balance every month. This balance can eventually grow and may exceed the value of your home, especially in times of a housing market crash, or if the borrower stays in the home for several years.
In order to be eligible for a reverse mortgage, you need to be a homeowner above the age of 55. While applying for a reverse mortgage you need to include all the individual’s listed on the home title.
You need to pay-off and close any outstanding loans or lines of credit related to your home. These include a mortgage and a home equity line of credit.
When should you get a reverse mortgage?
Retirement can be financially challenging for seniors who just depend on federal benefits such as the Canada Pension Plan and Old Age Security. These pension plans may help you survive but you will struggle to lead a comfortable life during retirement.
These benefits have struggled to keep pace with inflation amid rising real estate costs and higher costs of living. However, here’s where you can leverage the benefits of owning a home. The average Canadian has 55% of his net worth tied up in real estate and if you are part of this statistic, it means you are sitting on an enviable cash source.
The reverse mortgage is a financial product that allows you to access your money based on your home equity. For example, if you are a 60-year old staying in Brampton in a house that is valued at $500,000 you will receive close to $200,000 via a reverse mortgage.
You can apply for a reverse mortgage for several other reasons. For example, if you do not have a good credit score, access to debt becomes a difficult proposition. The number of borrowing opportunities is few, making a reverse mortgage a good option.
A reverse mortgage provides you with flexibility and liquidity that can be used to cover additional expenses. It can be used to pay for home repairs or improvements, to cover regular bills, healthcare expenses, or repay debt.
Pros and cons of a reverse mortgage
Before you decide to apply for a reverse mortgage you can look at the advantages and disadvantages of securing the loan. One of the major benefits is you don’t have to make regular loan payments. You have the opportunity to turn a portion of your home equity into cash while still holding the asset.
You do not have to pay any taxes on the amount you borrow and the loan does not impact pension payments such as the Old Age Security and Guaranteed Income Supplement (GIS).
On the other hand, interest rates on a reverse mortgage is higher than other types of mortgages. The equity you hold in your home may decline as the loan amount continues to accumulate. Your estate has to repay the loan including the interest within a particular period after your death.
The money you leave for your children in your estate via inheritance will also be significantly lower if interest continues to pile up.
The Bullish takeaway
A small portion of Canadians apply for a reverse mortgage. This may be due to confusing regulations and the disadvantages mentioned above. You can use this resource as a starting point to see if a reverse mortgage makes financial sense before you apply for one.