What is a Reverse Mortgage?
All too often, Canadian homeowners fall behind on costs such as property taxes or home insurance and as a result, cannot afford necessary home repairs or daily expenses.
If you’re in this predicament and find that your home equity is your biggest asset, you may be considering a reverse mortgage to help alleviate the financial burden. A reverse mortgage is essentially a way to borrow money against your home equity and avoid having to sell it.
A reverse mortgage is not a decision to be made in haste. Remember, it has likely taken several years to build the equity in your home, and this type of loan means you’ll be spending a significant portion of that money on interest in loan fees. Not ideal.
But homeowners in Canada don’t always have a choice.
If you’re considering a reverse mortgage, you probably have a lot of questions. We’re here to address them and help you understand more about this type of loan and whether or not It’s right for you.
Am I Eligible for a Reverse Mortgage?
To be eligible for a reverse mortgage in Canada, you must be a homeowner of at least 55 years of age.
If you are married and your spouse is also on the title for your home, they must also be 55 or older and register themselves on the reverse mortgage.
If you’ve not yet paid off the primary mortgage, you must first do so. Money received through a reverse mortgage can be used to pay off debts, liens, or existing mortgage payments.
Additionally, the home for which you’re taking out a reverse mortgage must be your primary place of residence. Typically, this is a home you reside in for more than half of a given calendar year.
How is My Loan from a Reverse Mortgage Made Available to Me?
How you receive your loan is determined by your lender and a few other points.
Either you’ll receive the loan in one lump sum, or you’ll receive a portion of it upfront and then get the rest over a certain amount of time.
Before you can use the loan amount for anything else, you must first pay off or close out any remaining lines of credit or outstanding loans in your name.
Once you’ve accomplished this, you can use the remainder to pay off things such as:
- Outstanding debts
- Healthcare costs
- Home improvements and repairs
- Help with paying weekly or monthly bills
How Do I Know if I Qualify for a Reverse Mortgage?
Provided you meet the basic eligibility requirements, lenders consider several factors when determining whether or not you qualify for a reverse mortgage.
Generally speaking, those who are older and have built up more home equity will be eligible for the most substantial loan sums. Lenders will also consider current market trends.
Other important factors include the location of your home as well as its condition and appraisal value.
What are the Benefits of a Reverse Mortgage?
The biggest positive with a reverse mortgage is that it allows you to keep your home and increases your cashflow. The money you borrow is also not subject to taxes, and it will free you from needing to make regular monthly loan payments.
A reverse mortgage will not negatively impact guaranteed income supplement or old-age security benefits that you may be receiving.
What are the Downsides?
Reverse mortgages do carry some drawbacks, which contribute to their stigma. Some downsides of a reverse mortgage are:
- High-Interest Rates – Reverse mortgage rates are typically higher than conventional mortgage rates, although monthly payments are not required.
- Decreasing Home Equity – Since interest compounds over time, homeowners may see a significant reduction in their home equity, leaving less inheritance for their beneficiaries.
- Fees & Costs – Reverse mortgages come with extra costs due to their uniqueness, including appraisal, legal, administrative, and prepayment charges.
- Impact on Estate Planning – Because the loan must be repaid when the homeowner sells or passes away, heirs could be left with less money after the home is sold.
- Eligibility & Restrictions – Homeowners must be at least 55 years old, and the amount available depends on factors like age and home value, limiting flexibility.
While a reverse mortgage can provide financial relief, these considerations should be carefully weighed before proceeding.
Is a Reverse Mortgage Right for Me?
Reverse mortgages aren’t viewed in quite the same negative light they once were.
It’s still not an ideal loan type, and it certainly isn’t for everyone. That said, people looking for immediate cash-flow savings can benefit, certainly. While a reverse mortgage may be a lifeline for some, it can also be an income planning tool for others.