Reverse Mortgages

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Reverse mortgages are one of the most misunderstood options you have as a homeowner to increase your cash flow, and one of the most powerful ones too. 

A reverse mortgage is a loan available to Canadian homeowners who are at least 55 years old. It allows you to access a portion of your home equity, tax-free without having to sell or move out of your home. 

Essentially, you can increase your cash flow while staying in the home you love.

Definition : What is home equity? Home equity refers to the difference between the current market value of a property and the outstanding mortgage balance. Putting it simply, if the value of your home is $600k and your mortgage is $200k, your home equity is $400k.

How does a reverse mortgage work compared to a regular mortgage?

Unlike a traditional mortgage, where homeowners make monthly payments to a lender, with a reverse mortgage, there is no monthly payment due.

The amount you receive is based on your age and the value of your home. For example, if the value of your home is $600,000, you can get a reverse mortgage for a portion of that, potentially $150K to $300K, and spend it as you wish. The more home equity you have, the more you may be eligible to receive.

Here’s the biggest benefit most people don’t always realize: You do not have to repay the amount borrowed through a reverse mortgage until you sell your home, move out, or pass away.

Essentially, it’s money you’re able to spend to achieve your dream goals while you’re still alive. If you sell, move or pass away, the lender then receives their money back through the sale of your home.

What are the benefits of a reverse mortgage?

Along with achieving your dream goals, here are a few other benefits to reverse mortgages:

Steady income during retirement years

A reverse mortgage in Canada can provide seniors with a steady income stream during their retirement years. This can be particularly beneficial for those who have limited income in retirement and need additional funds to cover living expenses like food, property tax, or unexpected costs.

Tax free money

The money received from a reverse mortgage is tax-free and can be used however you see fit, whether it is for home repairs, healthcare expenses, or simply to enhance the quality of your life. 

No negative equity guarantee (this is amazing!)

A no negative equity guarantee means that the borrower (or their estate) will never owe more than the value of their home, regardless of the property’s future value. This provides peace of mind to seniors and their families, knowing that they will not be burdened with a debt they cannot repay. 

What are some of the disadvantages of a reverse mortgage?

A reverse mortgage can be a good option for some Canadian homeowners, but it is important to consider the risks associated with this financial product. We’ll talk about what they are and how they might affect you, to ensure this is the right product for you.

Increasing debt

One of the main risks of a reverse mortgage loan is the potential for increasing debt. With a reverse mortgage, the amount owed increases over time as interest and fees accumulate. This amount is paid back to the lender if the house is sold or when you pass away. 

Impact on inheritance

With a reverse mortgage, the equity of the home decreases over time, which can reduce the amount of inheritance left for beneficiaries. If you want to leave a lot of money for loved ones, a reverse mortgage may not be the right solution for you. Having said this, the value of your home will most likely continue to increase over time and there is usually equity left in the home when the reverse mortgage is paid off.

Also, many people prefer to give their loved ones money now, before they pass, so they can enjoy watching them appreciate it. 

If you move or sell, you need to repay the reverse mortgage

You may be required to sell your home to pay back your reverse mortgage if you decide to move or live elsewhere.

Choosing the wrong reverse mortgage lender

Choosing the wrong reverse mortgage lender can impact the amount you have to pay back through higher interest rates and reverse mortgage payments. It’s important you work with a mortgage agent that knows which lenders offer the best interest rates and products to meet your financial needs. Lenders only promote their own products, meaning you’re missing out on products from other lenders or home equity banks that may have been better for you.

Who is eligible for a reverse mortgage?

Putting it altogether, if you meet these criteria, then you may qualify for a reverse mortgage and it may be a good financial solution for you:

  • You’re a senior 55 or older
  • You most likely won’t be moving or selling
  • You have equity in your home
  • You need funds for loves ones, vacations, renovations, health care expenses or more

Who are the reverse mortgage lenders?

There are a few different lenders that offer reverse mortgages, all with different terms, and interest rates. Not all reverse mortgages are equal, and finding the right reverse mortgage and reverse mortgage rates can be challenging if you’re not familiar with the types of reverse mortgages and their pros and cons. 

Where mortgage lenders in Canada may only promote their own products, you have the added benefit when you work with a mortgage agent to review all the banks and lenders to see which one best fits your financial needs and goals. 

In a quick chat, we can determine what your financial needs and goals are, and find the right reverse mortgage product that’s best for you. We will take the time to answer all your questions to help you know if it could be a good fit for you.

It is crucial for individuals considering a reverse mortgage to carefully weigh the pros and cons and assess their long-term financial goals before making a decision. And that’s what we’re here for! Consulting with a mortgage broker is recommended to ensure a thorough understanding of the risks involved and to explore other alternatives if needed.