08 Jul Reverse Mortgages in Canada
Many Canadians are reaching their retirement years with a paid off house, but not enough money in the bank. For many of these homeowners, the answer to maintaining their lifestyle might just be a reverse mortgage.
As defined by Investopedia, a reverse mortgage is “a type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold.”
The amount of a reverse mortgage loan is usually conservative – lenders won’t let homeowners borrow more than about 50 percent of the property’s value.
Homeowners can structure their reverse mortgage in a few different ways. Some choose to receive a large lump sum; others prefer regular monthly payments. It’s also possible to do a combination of the two. This flexibility allows property owners to access their equity in a way that works for them.
Let’s look at an example to see how a reverse mortgage works. Don and Sally are ready to retire. Their home, in the outskirts of Toronto, is worth about $600,000 and is paid in full. They do, however, owe about $20,000 on their line of credit for a recent kitchen remodel. They worry about not having enough to retire, since they weren’t able to save much money during their working years – all of their funds went to their high mortgage payments.
Our couple decides they would like to use some of the equity in their home to help them in retirement. They take out a reverse mortgage. They get an upfront lump sum of $40,000 to pay off their line of credit and buy a new car. They then request an additional $1,000 each and every month, which they can use however they please. When added to their CPP, Old Age Security pensions and Don’s small company pension, Don and Sally foresee being able to maintain a similar style of living as they did before retiring… only they no longer need to go to work every morning!
A reverse mortgage can be used for many reasons. In Canada, it’s most often used by seniors, looking to increase their retirement income without having to sell their home. Other popular reasons for this type of loan are to pay for renovations, pay off existing debt, buy a cottage or travel.
Since homeowners don’t make monthly reverse mortgage payments, they don’t have to include the expense in their budget. No need to stress or worry about paying back the loan. While still alive, a reverse mortgage and the accumulated interest would only be paid back if the homeowners sell their home. In most cases, there is still a significant amount of money left over after the sale. This is due to the conservative loan amount and the potential appreciation of the property.
A second mortgage lets owners keep control of where they live. They can choose to continue living in their current home for as long as they wish. They can also choose to sell it to downsize or become a snowbird. For many Canadians, a reverse mortgage can open up a world of possibilities.