Times have changed. In Canada, life expectancy is much longer than it has been in the past. People are living well into their 90s and their savings and pensions don’t always add up to the amount they actually need to live on in retirement. When typical sources of income like these fall short, older Canadians have been turning to other income options such as reverse mortgages. A Reverse Mortgage is a loan that allows you to take money from your home equity without having to sell your home. You can use that extra money to offset the income shortage you are experiencing. When the time comes to sell your home, the money you borrowed is paid back to the lender. To illustrate: if you bought your home years ago for $100,000 and that home in today’s market is now worth $750,000 you can borrow up to 55% of the current value of your house. Although the home must be valued at a minimum of $200,000, you can see how this type of mortgage can help fund retirement situations using the value in your home.
Unlike a line of credit, a reverse mortgage does not require income verification. To be eligible for a reverse mortgage you only have to be a homeowner, 55 years of age and have equity in a home worth $200,000 or more.
The maximum amount of money you can borrow from your mortgage, however, depends on:
- Your age and the age of other people registered on the title of your home.
- Your home’s appraised value and condition.
- The type of home you own.
- Where you live.
- Your lender.
What Are The Pros of a Reverse Mortgage?
- You can use the cash you take out of your home equity to pay off debt, cover everyday expenses, make renovations, support your family or pay for in-home care while in retirement.
- You can often use this type of mortgage even if you have bad credit.
- You own the property for as long as you live in the home. The lender cannot transfer ownership of your property.
- You can exit your reverse mortgage at your convenience by paying your mortgage amount in addition to the interest incurred.
- A reverse mortgage does not affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
- The equity you access is tax-free and there are no regular monthly mortgage payments. You pay your loan when you move, sell the home, or pass away.
- You can choose to receive a single cash deposit or several smaller deposits.
- You do not have to prove income to qualify.
What Are The Cons of a Reverse Mortgage?
- Interest rates and fees of a reverse mortgage are typically higher than most other types of mortgages.
- There are costs associated with this type of mortgage such as mortgage insurance, start-up fees, appraisal fees, and interest.
- Your current mortgage must be paid off before a reverse mortgage can be registered.
- You may be charged a penalty fee if you pay your reverse mortgage early.
- The equity in your house may go down as you accumulate interest.
- Your estate has to repay the loan and interest within a set period after you pass on. This can result in your children or benefactors inheriting less or having to sell the house.
- You may not be able to borrow money against your home in the future.
- If you decide to move from the property, you must repay the loan within a specified time period.
- To be released from the mortgage agreement, you must sell your home, repay the loan or pass away. In the event you pass away, your estate becomes responsible for paying back the lender..
Is a Reverse Mortgage Worth It?
A reverse mortgage can be a useful source of funding for people who need to increase their income to be comfortable in retirement. However, it may not be right for everyone. Specifically, these are factors to consider:
- Your home is increasing in value: if you bought your home years ago when housing costs were lower and have paid off your mortgage, why not take advantage of the extra equity?
- You want to stay in your home for a long time: the costs associated with this type of mortgage can accumulate so you will need to plan how long you will stay in your home.
- Consider other costs associated with your home: property taxes, maintenance, and insurance are some of the costs of owning a home. You must ensure you are able to pay these expenses.
A reverse mortgage can help you if you require funds for major or pending expenses. While selling your home or downsizing are also options you can consider, you should consult with an experienced mortgage broker. Not only can I, Darren Robinson, provide you with reverse mortgage options; I can also advise you on the best options for your situation as an experienced financial advisor. Before applying for any mortgage, there are questions you need to ask such as what are the associated fees, interest, and penalties? As your broker, I can help you explore all your options and make sure you understand the obligations, penalties, and what can happen to the property after your passing. I can assist you in making these sound financial decisions. If you are contemplating using a reverse mortgage to increase your income, give me a call today at 705-315-0516 or click here to book a virtual meeting online to talk about whether a reverse mortgage is right for you in retirement. If it’s not the right option, there are other options we can explore that might fit your needs. Let’s talk about those too. Being well-informed is the first step in making smart financial decisions throughout your life.