If you are a homeowner, you probably already know how a forward mortgage works – it is a loan you use to purchase a house. A reverse mortgage, also known as ‘equity release,’ is precisely the opposite of it. In simple terms, it is a loan that allows you to borrow money against your equity in your house without actually having to sell the house.
More and more aging Canadians are relying on reverse mortgages to provide themselves with a steady cash flow or an influx of cash during economically challenging times. Canada is witnessing a steady rise in reverse mortgages, and understandably so. In the present economic conditions, pensions are declining and long-term healthcare is becoming a costly affair day by day, with longevity on the rise. In such a case, reverse mortgages appear to work in their favor.
So, how do reverse mortgages work?
If you are a qualifying homeowner, i.e.,
a. you are 55 years or older,
b. you’ve paid off all the outstanding loans in which your home was the collateral,
c. the home you are considering to secure a reverse mortgage on is your primary residence.
Then, based on the lender, the condition of your house, its appraised value, and location, you can borrow up to 55% of your home’s value. You can receive the funds tax-free, either as a lump sum or in the form of regular, monthly installments.
There are no restrictions on how you choose to spend the money received from your reverse mortgage. You can use the funds for home improvement, pay for health care, use the regular deposit to pay for your living expenses such as bills, or repay any other debts.
What does a reverse mortgage mean for my home equity?
Reverse mortgages allow you the opportunity to create a stable cash flow from your house by using your current home equity as a security for the loan received. The homeowner might enjoy any appreciation in the home’s value; similarly, any decline will be borne by the lender. The homeowner will also be liable to repay only the fair value of the home mortgaged.
How do I repay the reverse mortgage?
You don’t need to pay the interest or repay the loan like you would with a traditional loan. The interest on your reverse mortgage accumulates over time and the loan becomes due for repayment once the last surviving owner dies, or you move out of the house, or you sell the house.
However, if you want, you can pay off your reverse mortgage before the term by repaying the principal as well as the interest, in total, at any point in time. You might have to pay a small fee if you wish to repay the reverse mortgage earlier.
If you are considering getting a reverse mortgage on your home, consult your financial and legal advisor to make sure that you understand all the pros and cons of it beforehand.