Everyone wants to live comfortably in retirement, but not all are able to plan well enough to actually do so. It can be challenging for many who find themselves with limited income after the end of their work life, to live a comfortable and worry-free retirement. However, there is thankfully an option for the seniors who end up cash-poor but house-rich. The option is called the “Reverse Mortgage”.
Reverse Mortgage is a loan that is secured against the value of a home. The homeowner can borrow up to a certain percentage of the present home value. Unlike a conventional mortgage, one does not have to pay it back through monthly installments. The mortgage continues to grow as accrued interest on the loan is added to it. The entire loan has to be paid off when the homeowner moves out, sells the house or passes on.
Increasing Demand for Reverse Mortgages in Canada
In the recent years, there has been heightened interest in Reverse Mortgages throughout Canada. As a Real Estate professional, I receive many inquiries from seniors. Some of the common questions are –
What is a Reverse Mortgage and how does it work?
Am I eligible for a Reverse Mortgage?
How much money can I get if I take on a Reverse Mortgage?
Where can I get a Reverse Mortgage?
Is it advisable to get a Reverse Mortgage?
I have addressed the concept of a Reverse Mortgage in the first section of this article. As regards to who can qualify for a Reverse Mortgage, the applicant has to be aged at least 55 years and owner of a fully paid-up home.
In case you hold joint title of the home with spouse, both of you should be 55 years old or more. The home against which you wish to secure the mortgage should be your primary residence where you have lived for a minimum of 6 months in a year. It should be well-maintained and up-to-date with insurance.
You can access up to 55% of the home equity as the loan, which is tax-free money. The exact amount, however, will depend on several factors such as the type of property, its location, condition, appraised value and also your age. The funds can be received as a lump sum, or a regular monthly payment or a combination of both.
There are a number of sources for obtaining a Reverse Mortgage in Canada. The largest one is the is HomeEquity Bank that offers the Canadian Home Income Plan (CHIP.) Another source is the Equitable Bank that provides the PATH Home Plan in Ontario, Alberta and British Columbia. The last source is through selected Mortgage Brokers across Canada who most likely will provide you access to CHIP or PATH or private B-lenders who deal in such loans.
Pros and Cons of Reverse Mortgages
There are several reasons why taking out a Reverse Mortgage makes sense for seniors with little income. The advantages of doing so are:
- Proof of Income not required to qualify
- No need of making regular payments
- Old Age Security or Guaranteed Income Supplement is not affected
- No fixed tenure of the loan
- Loan amount never exceeds the property value
- The loan can be repaid at any time
- Home equity remaining after paying off loan belongs to borrower/heirs
If investment income is earned by using mortgage money, interest paid on the Reverse Mortgage could be tax deductible however, the advice of an accountant is definitely recommended before you do this
Meanwhile, Reverse Mortgages do have some drawbacks as well. These include:
- Costs and fees are usually higher than that of a traditional mortgage
- Debt increases every month as you draw from the equity of your home
- Leaves less money for the heirs of borrower
- Stiff penalties on early repayment of loan (in part or full)
- Loan becomes due if borrower moves into full-time care facility for an year or more
Using Funds from Reverse Mortgages Wisely
Your home is most probably the biggest asset that you acquire in your lifetime. However, you cannot use much of its value until you sell it. A Reverse Mortgage allows you to turn some part of your home value into cash, while still retaining ownership of the house.
Funds received through a Reverse Mortgage can be used for anything you choose. Some smart options are paying off debt, paying medical bills or making home improvements. Depending on the equity in your home, you could even contemplate investing the money to generate you a reasonable monthly income that could supplement your retirement income. That money in turn could be used for your leisure activities!
As an experienced Real Estate expert, I believe that Reverse Mortgage on homes can be an ideal option for seniors who want to add a little comfort to their retired life and do not wish to be burden to their children. I can help you understand the process and put you in touch with a qualified mortgage specialist who can take you through the detailed steps to getting started on a Reverse Mortgage.