Canadian seniors are cashing in on reverse mortgages. In fact, reverse mortgage debt reached $4.42 billion in October 2020. It’s true that reverse mortgages aren’t as popular as other mortgages and that’s because it isn’t really a mortgage in the proper sense of the word.
So what is a reverse mortgage in simple terms?
A reverse mortgage is a loan that enables you to receive money from a lender using the equity of your home as a guarantee against the loan without having to sell the property. You can borrow funds to a certain level, but the maximum amount allowable depends on several factors such as:
- Your age
- Your lender
- Your property value
The good thing about a reverse mortgage is you don’t immediately start paying on the loan until it is due. However, the longer you hold out on payments the more interest you’d have to fork over. The consequence of this is a slowly depreciating equity on your property.
How to Qualify for Reverse Mortgage
To qualify for your reverse mortgage you have to:
- Own a home
- Be 55 years or older
If you live with a partner and have both your names endorsed on the title deeds of the property, you both must have your names filled on the reverse mortgage form. In addition, you both must be 55 years or older at the time of making the application.
The property you will use as security for the reverse mortgage has to be your main residence. What this means is you live in the property twenty-six weeks out of the fifty-two weeks in a year.
Any mortgage on the property must be paid off as soon as you secure your reverse mortgage. You can use the funds you receive from your lender to pay off any debt including liens and mortgage on your property.
There are two ways to receive money from your reverse mortgage. These are:
- As a onetime payment.
- As a part payment with a lump sum upfront and the rest spread over a period.
Whichever way you prefer, make sure you find out what method your lender offers and whether you will have to pay fees or commissions to process the transaction. Remember the money you get from your reverse mortgage can pay for expenses such as:
- Home repairs
- Standard bills
- Medical expenses
- Repay debt
Once you take a reverse mortgage, you can’t use the property to secure a further loan. Make sure you consult your broker to consider your options carefully.
Repaying Reverse Mortgage
Once you’ve received money from your reverse mortgage, eventually you’d have to think about repaying the debt. Reverse mortgage horror stories abound where loans are due and the borrower cannot pay up.
In such instances, the home will have to be sold or turned over to the lender to write off the debt. This doesn’t have to be you. Inquire from your lender about the various means of making payment.
Most times, the lender gives you the choice of repaying the reverse mortgage at any time. But you’d likely be charged a fee for paying before the loan is due. If you sell the property or change location, you’d have to pay back the entire loan sum or any outstanding on the debt.
Some of the ways you can default on your reverse mortgage include:
- Applying the funds into illegal ventures
- Telling lies on your reverse mortgage application
- Allowing your home to enter a state of rot and disrepair which reduces its property value.
- Breaching conditions attached to the revised mortgage agreement.
It’s important at this point to understand default on a reverse mortgage varies from lender to lender. Before taking a reverse mortgage, ask your lender the ways by which you can be liable for default. If you pass away before you pay the debt, the obligation to pay up will rest on your spouse or heirs.
The duration of time you have to pay depends on the circumstance of your reverse mortgage. Find out from your lender how much time you have to pay back your loan.
Cost of Reverse Mortgage
For you to secure a reverse mortgage, it’s inevitable you’d incur costs. Some of these costs include:
- Higher interest rates than the conventional mortgage.
- Property appraisal charge
- Setup fees
- Prepayment penalty where the homeowner pays off the reverse mortgage before maturity.
- Legal fees.
As with any other process, the cost you will incur varies from lender to lender. Similar fees may have different terms and while you’d have to pay some fees up front, others are added into your loan balance.
Take your time to compare rates from different lenders before applying for your reverse mortgage. Canada doesn’t have many financial institutions that offer reverse mortgage products so your pickings are slim. However, you can compare alternative options such as:
- Applying for a personal loan
- Selling your property
- Purchasing a smaller home
- Renting a different apartment
- Moving into a long-term care facility
Once again, it is good practice to consult a financial advisor before applying for a reverse mortgage. Dedicate your time to understand the various aspects of a reverse mortgage and how it affects the equity of your home.
Reverse Mortgage Lenders in Canada
As pointed out earlier, there aren’t many financial institutions that offer reverse mortgages to customers. The two major lenders offering reverse mortgage in Canada are:
- Equitable Bank
Equitable Bank assists Canadians to get reverse mortgages through their PATH Home Plan. The mortgage product can be obtained through mortgage brokers in British Columbia, Alberta, and Ontario.
- HomeEquity Bank
HomeEquity provides reverse mortgages under the Canadian Home Income Plan and it’s accessible across Canada via your nearest HomeEquity Bank branch or as well as mortgage brokers.
Nonetheless, you should ask your financial institution for mortgage products that suit your needs.
Pros and Cons of Reverse Mortgage
As with all mortgage products, there will always be reasons to secure them and reasons to look for alternatives. Reverse mortgages are no exception.
Some of the reasons you need to apply for a reverse mortgage include:
- No payment in installments like a traditional mortgage
- Ability to convert part of your home’s equity into cash without selling the property
- No taxes on the cash you borrow from your lender
- No interference with your Guaranteed Income Supplement or Old Age. Security benefits.
- You keep ownership of your home
- Varied options to how you’d like to receive your money and when
Some of the reasons to seek alternative finance are:
- Interest rates that will cost you an arm and a leg
- The grip you have on your home’s equity may weaken as interest rates accrue over a long period
- Your estate or heirs are liable to take the fall for the loan within a limited time if you pass away before paying off the reverse mortgage
- Your heirs may have little time to pay up on the reverse mortgage because they need more time to settle your estate
- Higher costs than a regular mortgage
- Less money for your heirs after balancing the estate account and settling your reverse mortgage
If you’d like to prevent reverse mortgage problems from happening in the future, you should ask your financial institution questions on:
- The charges you will incur while securing your reverse mortgage
- The options to receive your money and if there are fees attached.
- The reverse mortgage rates on the principal
- Prepayment penalties for selling off your property or paying off the loan before the due date
- The length of time provided by the lender in scenarios where you pass on and the debt has to be settled
- The cause of action in a situation where the debt is higher than the property value
A reverse mortgage is not for everyone. It’s a package that’s perfect for Senior Canadians who’d like to cover the cost of their retirement without selling their homes. Once you meet the requirements, make sure you consult your financial advisor and consider other options before securing your loan.