A reverse mortgage is a type of loan targeted at senior individuals who are looking for a way to borrow some money during retirement. The way this type of loan works is that it allows homeowners above a certain age to borrow money against their home equity. How much money you are allowed to borrow will depend on factors such as age, home equity value, and the type of lender you choose. As a rule of thumb, you will be allowed to borrow as much as 55% of the value of your home.
The thing that differentiates reverse mortgage loans from traditional loans is that the homeowner does not need to make any loan payments right away. The balance becomes payable and due in its entirety the moment you decide to move away from the house permanently, sell it, or if you pass away.
While this is a good option for Canadian seniors, especially those whose net worth is mostly bounded to their homes, many don’t even know they have this option. To learn more about reverse mortgages and whether this is a good alternative for your financial needs, we have put together a list of questions and answers, which you can read below.
Who can apply for a reverse mortgage?
To be able to apply for a reverse mortgage in Canada, you need to be a homeowner and at least 55 years old. If there is more than one homeowner listed on your home’s title, you need to mention every person on the mortgage application and ensure they are also at least 55 years of age. Keep in mind that the home you are borrowing against needs to be your primary residence.
In some cases, lenders may require homeowners to seek independent legal advice and provide proof of this to make sure the individual understands exactly what they are signing up for.
When reviewing your application, the lender will take into consideration the age of all homeowners listed on the title, the area in which the house is located, as well as the type, condition, and value of the house.
How do reverse mortgages work?
To be able to get a reverse mortgage, you need to make sure any outstanding loans secured by your house, such as mortgage loans and HELOCs (home equity line of credit), are paid off. You can accomplish this with the money you obtain from the reverse mortgage as well. At the same time, keep in mind that if you take out a reverse mortgage loan, you may not be able to benefit from other home-secured financing options, such as taking out a HELOC or other similar alternatives.
In the case of a reverse mortgage, the lender is the one making payments to the homeowner instead of the other way around. Over the life of the loan, the debt of the homeowner will increase, and the home equity will decrease.
When you decide to move out of the house or if you pass away, profits from the sale of the home go towards repaying the reverse mortgage’s principal, interest, and fees. Any earnings from the sale that exceed the amount borrowed will go to the homeowner or the homeowner’s estate.
How do I pay back a reverse mortgage loan?
A reverse mortgage does not require you to make any regular payments. At any moment, you have the option of repaying the loan and interest in full. However, if you pay off your reverse mortgage early, you may be subject to some fees.
The reverse mortgage needs to be paid in full the moment the borrower dies, moves out of the house permanently, or sells the house. While there are no fixed monthly payments that could result in failure to pay out the debt, there are also instances in which you can default on a reverse mortgage and be required to repay the amount left. These instances include:
- Using the money for illegal activities
- Committing fraud in your application
- Allowing your house to fall into decay, lowering its value
- Not adhering to any of the terms of your reverse mortgage contract
Are there any other costs I should know about?
Besides the actual cost of the loan, there may also be other fees you need to cover when the loan is due. These fees vary from lender to lender but usually include:
- Home appraisal fees
- Setup fees
- Prepayment penalties for choosing to pay off the loan before it’s due
- Legal fees and closing costs
- Higher interest rates than traditional loans
Some of these fees may be included in your loan balance, and some may require upfront payment, so make sure you discuss these aspects thoroughly with your lender before you sign on the dotted line.
What are the benefits of a reverse mortgage?
A reverse mortgage can bring a range of benefits to the borrower, which is why many seniors consider it a good option for retirement income. The biggest advantages of this type of loan include:
- Not needing to make regular payments
- The value of the home is turned into money without the need to actually sell it
- The borrower does not need to pay taxes on the money
- If the borrower is receiving any Old-Age Security or Guaranteed Income Supplement benefits, these will not be affected
- You get to keep the title to your home
- You have plenty of options to decide when and how to get your money
How about the downfalls?
Just as any financial product, reverse mortgages also come with some risks you need to be aware of. These include:
- Interest rates are typically higher than traditional loans
- As interest grows, the value of your home may decrease
- If you pass away, your heirs have a limited time to repay the loan
- It’s possible that the time it takes to settle an estate will be longer than the time allotted to repay a reverse mortgage.
- Your children or other dependents may inherit less money from you
