You’ve worked hard all your life to be able to enjoy a comfortable retirement. Although they’ve made plans and built up their savings, many Canadians are forced to tighten their belts during retirement because of how quickly the cost of living rises. Dreams of an easy-going, peaceful life filled with travel and other activities may no longer seem attainable. All of that can change if you take advantage of a reverse mortgage.
Reverse mortgages can provide seniors whose wealth is mostly based on the value of their home with some much-needed funds.
Even though reverse mortgages have been available to Canadian homeowners for more than 25 years, many still have reservations and are unsure if it is the best decision for them. Granted, these are complex financial products that can sometimes be subject to scams.
This article will explain how reverse mortgages work, how to get one, their advantages and disadvantages so that you can make an informed decision.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that’s secured through your home’s value. It is intended solely for homeowners who are 55 years or older. If you qualify, you can use a reverse mortgage to turn up to 55% of your home’s value into cash that you don’t have to pay taxes on and can use to pay various monthly expenses, travel, pay off other debts or renovate your home – this is up to you. A reverse mortgage calculator 2022 can help you find out the exact amount that you can borrow.
It’s important to note that a reverse mortgage does not require the homeowner to make any loan payments, unlike a forward mortgage – the type of mortgage you use when buying a home. Repayment of a reverse mortgage is only due when the borrower passes away, moves, or sells their home.
There are also regulations in place to ensure that the amount the borrower needs to repay will never be more than the market value of their home. Borrowers just have to maintain their homes in good condition and pay their taxes and insurance.
How Does a Reverse Mortgage Work?
So, how does a reverse mortgage work in Canada? When you get a reverse mortgage, the lender makes payments to you instead of the other way around. You get to choose how you want to receive these payments, and you pay interest on the amount received.
You don’t pay for anything upfront. This interest is added to the loan balance. You also remain the owner of your home.
Over time, your debt from the reverse mortgage with increase and your home equity will decrease. A reverse mortgage also uses the home as collateral, just like a forward mortgage. If you decide to sell your home, at least part of the proceeds will go to your lender to cover the principal, interest, fees and mortgage insurance. Anything beyond this will be returned to you as the homeowners or to your estate.
In some cases, the borrower’s heirs decide to pay off the reverse mortgage so they can keep the property.
Getting a reverse mortgage requires you to pay off and close all liens on your home. This can mean a forward mortgage or a HELOC (home equity line of credit), but you can use some of the money you get through the reverse mortgage to do this.
We also need to note that getting a reverse mortgage may limit your ability to obtain additional loans secured through your home, such as HELOC or similar financial products.
When you take out a reverse mortgage, you have six options for receiving the proceeds:
- Lump sum: When your loan closes, you’ll receive the entire amount in one lump sum. With a lump sum you get a fixed interest rate. The other options have adjustable interest rates.
- Equal monthly payments: This option is also called a tenure plan. The lender will provide you will regular payments for the duration of the loan as long as your home remains your primary residence.
- Term payments: You get equal monthly payments for an agreed-upon period of time – 10 years, for example.
- Line of credit: The money you borrow through the reverse mortgage is available to you whenever you need it, and you only pay the interest.
- Equal monthly payments plus a line of credit: You get steady monthly payments plus access to a line of credit if you need additional funds at any time.
- Term payments plus a line of credit: You get monthly payments for an agreed-upon period of time plus access to a line of credit.
You’ll want to ask your lender about the payment options they offer, as well as restrictions and fees.
As we mentioned before, with a reverse mortgage, you don’t need to make regular payments. However, you can always pay back the principal and interest if you choose to, but you may have to also pay an additional fee for early payment.
A reverse mortgage needs to be repaid in full if:
- The borrower wants to sell the home;
- The borrower wants to move out of their home;
- The last borrower passes away;
- The borrower defaults on the loan.
Borrowers can default on a reverse mortgage if:
- They were dishonest in their application for a reverse mortgage;
- They used the proceeds from the reverse mortgage to do something illegal;
- They didn’t maintain their home in good condition, letting it fall into a state of disrepair and therefore lose some of its market value.
- They did not adhere to the terms specified in their contract with the lender.
Note that different reverse mortgage lenders can have different conditions regarding this, and you’ll want to ask them what would cause you to default on your loan.
The time period during which you or your estate must repay a reverse mortgage also varies. If the borrower passes away, their estate has to pay back the mortgage within 180 days, and if the borrower moves into long-term care, they must pay back the loan in one year. You’ll also want to ask your lender about these conditions.
Getting a reverse mortgage may be the only way to access your home equity if you’re a Canadian homeowner above the age of 55 who either can’t qualify for a home equity loan or refinancing or simply doesn’t want the responsibility of making monthly loan payments.
However, it requires you to spend a considerable portion of the equity you’ve built up on interest and fees. Plus, it will also prevent you from being able to leave your home to your children or other heirs.
If you’re taking a reverse mortgage only as a short-term solution for financial problems and it’s not a long-term plan, it may not be the right choice for you, and you should explore other options.
