What is a Reverse Mortgage?
A reverse mortgage is a loan based on the value of your home.
With a reverse mortgage, you are not selling your home to the lender. You still hold the deed to your house and you get to live in your home.
A reverse mortgage means that you do not have to start making any payments on the interest or the principle for a very long time.
What Should I Know About Reverse Mortgages?
You can receive the funds from a reverse mortgage in installments over a long period of time or in one lump sum. With every payment made by the lender to you, the lender gains equity in your home.
Throughout the duration of your reverse mortgage, you do not need to pay anything except your property taxes and house insurance. However, when the mortgage is due to be repaid, the borrower (or their estate) must repay the total amount borrowed plus interest.
You may be able to borrow up to 55 percent the total value of your home. This is dependent on your age, home’s appraisal value, current interest rate and your choice of lender. The higher your age and home’s value, the larger the reverse mortgage you could get.
The interest rate charged for a reverse mortgage is determined during the creation of your loan agreement. The interest rate depends on whether it is fixed or variable, and also depends on where you live, the value of your property, your age and your spouse’s age.
The interest is charged on a monthly basis, but you don’t pay the interest until the mortgage is due to be repaid. The interest will be added to the total outstanding balance of your mortgage.
You must pay off your loan when you decide to move or sell your home. If you pass away, your spouse or estate must repay the loan. In most cases, the property is sold, and proceeds are used to repay the reverse mortgage and interest.
How Do I Qualify For A Reverse Mortgages?
To obtain a reverse mortgage you need to be at least 55 years old.
If you have any mortgages, a reverse mortgage lender will typically insist that these are paid off before arranging the reverse mortgage. In some cases, your reverse mortgage lender may offer to pay off your existing non-mortgage debts also.
The property must be considered your primary residence, meaning that you must live there at least 6 months of the year.
Benefits of a Reverse Mortgage
You can receive the reverse mortgage in many ways, from a lump sum to a monthly payment or a combination of both. You can use this money for anything you want, there are no restrictions. Reverse mortgages give you the flexibility to make investments, home repairs or renovations, or pay off debt or other expenses.
The Canadian government does not consider the reverse mortgage funds as taxable income. If you are a senior citizen, your old-age security will not be affected by the reverse mortgage because the government does not consider it taxable income.
The Downside of a Reverse Mortgage
A reverse mortgage comes with higher fees and interest rates than a regular mortgage.
Since the lender is paying you for equity, you are losing some ownership of your home with each payment you receive. This means that you will have less equity to use for other endeavours or to give to others in the future which could lead to estate complications for your beneficiaries.
A reverse mortgage can be cancelled if you don’t pay property taxes and insurance.
You may be charged a prepayment fee if you decide to pay off the mortgage before its term is over.
How Much Does a Reverse Mortgage Cost?
Costs will vary depending on your lender, but you should be prepared to pay for home appraisal and loan administration fees.
Reverse Mortgage interest rates often range from 4.75 to 6 percent and are charged against your outstanding balance each month. You do not pay the interest until your loan term is over. This means that the longer you use a reverse mortgage the more interest charges you will accumulate.
The main factors that influence your interest rate are your age, current unsecured debt, whether you opt for a variable or static interest rate, and home’s value and location.
Where Can I Go to Get a Reverse Mortgage?
In Ontario there are only two lenders that offer reverse mortgages. Home Equity Bank offers the Canadian Home Income Plan (CHIP), and Equitable Bank provides reverse mortgages through the PATH Home Plan. You can also work with a mortgage broker to setup your reverse mortgage through CHIP. This may have some added benefits.
Speak with a mortgage broker to fully explore your options. A broker can negotiate the mortgage on your behalf and inform you on the legal guidelines that govern reverse mortgages.
Many Canadians worry about rising living expenses and many of them are senior citizens. The population of our seniors is expected to grow from 6 million to 9.5 million by 2030, and among them, reverse mortgages are gaining popularity. There are many things to consider when deciding whether to get a reverse mortgage. You can learn about your options here or by calling 647-363-6746 to talk to a broker and get a free quote.