Have you heard of reverse mortgages?
Reverse mortgages are gaining popularity and receiving increasing attention as a retirement strategy. We ask: do the sums add up?
What is a reverse mortgage?
A reverse mortgage is a loan for an amount that represents a percentage (in general, 55%) of the equity value of your home.
The loan must be repaid when:
- you move out
- you sell your home
- the last borrower dies
It is at this point that you must pay off the loan in full, plus the interest.
The reverse mortgage is a strategy that allows you to keep your home even though your income may be limited.
In financial circles, people who opt for a reverse mortgage are called house rich, cash poor. Often, they bought their home for a song and the effect of the property bubble now means their home is worth more than their retirement income.
Who can apply?
To qualify for a reverse mortgage, you need to meet the following:
- You must own your home.
- It must be your primary residence where you live at least six months of the year.
- You have paid off the full balance of your mortgage and line of credit.
- All owners of the property must be at least 55 years old.
If your spouse co-owns your home, his or her name must also figure on the reverse mortgage application.
Criteria the financial institution will scrutinize
The lender will look at three things when considering your application for a reverse mortgage loan:
- Your and, if relevant, the other co-owner’s age
- The location of your home
- The value, condition and type of property
Generally speaking, the older you are the higher the equity in your home, and the greater the possible loan amount you could apply for.
Repaying your reverse mortgage
As long as you continue to live in your home, you do not have to make regular repayments on a reverse mortgage.
However, the longer you go without making any repayments, the more the interest on the reverse mortgage will accrue and will add to the initial amount borrowed.
If you sell your home and move out
You must reimburse the entire balance of the loan.
If you die
Your estate will have to reimburse the full amount of the loan owing when the last co-owner of the property dies.
The time allowed for paying off the loan varies from one lender to another. This is a question you must ask your mortgage broker.
If you want to repay the full balance of the loan
You can repay the principal and interest at any time before the reverse mortgage matures. However, a penalty fee may apply.
Advantages and disadvantages of the reverse mortgage
You retain ownership of your home.
The money you receive from the loan is tax-free.
The loan amount (interest included) can grow to exceed the value of your home.
You do not have to make regular reverse mortgage repayments.
Your heirs must pay off the reverse mortgage quickly after you die, sometimes even before the estate is settled. Do they have the means?
You will have less to leave your beneficiaries.
You can finance retirement projects or pay off your debts.
The costs of obtaining a reverse mortgage are higher than other types of loan.
Who offers reverse mortgages?
Only two financial institutions offer reverse mortgages in Canada.
Your mortgage broker will be able to help explain how to apply.
Your advisor can help
For more information on reverse mortgages and to see whether this might be an option for you, get in touch with your mortgage broker or advisor who will assess your retirement needs with you and discuss the consequences for your estate.
Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ Insurance cannot be held responsible for any decision made as a result of reading this blog post.