What is a Reverse Mortgage?
A reverse mortgage is a unique loan product designed for seniors. It allows you to borrow against the value of your home, receiving tax-free cash without having to make monthly mortgage payments. This can be a great way to supplement your retirement income, cover unexpected expenses, or make home improvements.
This type of mortgage is offered by 3 National companies in Canada.
Things to Consider:
While reverse mortgages offer advantages, there are also some crucial factors to weigh before diving in:
- Equity Limits: The amount you can borrow is typically capped at 55% of your home’s appraised value. This limit can be further affected by your age and the age of any co-borrowers.
- Interest Rates: Reverse mortgages tend to have higher interest rates than traditional mortgages. Remember, the interest accumulates over time and gets added to the loan amount, increasing what you owe.
- Impact on Benefits: Reverse mortgages generally don’t affect government benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).
Alternatives to Explore
Before committing to a reverse mortgage, it’s wise to explore other options:
- HELOC (Home Equity Line of Credit): A HELOC allows you to borrow against your home equity like a credit card, with interest charged only on the amount used.
- Downsizing: Selling your current home for a smaller one can free up cash while potentially lowering your housing costs.
A reverse mortgage can be a good option for Canadian seniors in the following situations:
- Need cash to supplement retirement income: If your pension and savings aren’t enough to cover your monthly expenses, a reverse mortgage can provide a steady stream of income.
- Cover unexpected expenses: Major medical bills or home repairs can wreak havoc on your budget. A reverse mortgage can be a source of funds to cover these unplanned costs.
- Want to make home improvements but don’t want to move: Perhaps you yearn for a more accessible bathroom or an upgraded kitchen. A reverse mortgage can help finance these renovations while allowing you to age comfortably in your familiar surroundings.
- Have limited income and high housing costs: Property taxes and maintenance can be a burden for seniors on fixed incomes. A reverse mortgage can help ease this burden by providing additional cash flow.
- No dependents who rely on inheriting your home: If you don’t have heirs who expect to inherit your property, a reverse mortgage allows you to access your home equity without leaving them with a smaller inheritance.
However, reverse mortgages may not be suitable for Canadian seniors in the following situations:
- Plan to leave your home to heirs: The longer you stay in your home and access funds through a reverse mortgage, the less equity there will be left for your heirs.
- Have other debts that need to be paid off: Adding another debt on top of existing ones can worsen your financial situation. It’s best to deal with other outstanding debts before considering a reverse mortgage.
- Uncertain about your future living arrangements: If you think you might need to move into a care facility in the near future, a reverse mortgage may not be the best option. You could be forced to sell your home to pay off the loan.
- Poor credit history: Qualifying for a reverse mortgage with a very poor credit score may be difficult and could result in less favorable loan terms. However, don’t let this be a deterrent as all requests are reviewed on a case-by-case basis, taking into consideration all strengths of an application.
- Don’t understand the financial implications of a reverse mortgage: Reverse mortgages come with complex financial implications. Make sure you fully understand how they work and how they will impact your long-term finances before deciding.
The Bottom Line
It’s important to weigh the pros and cons carefully and consult with a mortgage broker to see if a reverse mortgage is the right choice for you.
Reverse mortgages can be a valuable tool for seniors seeking financial flexibility. However, it’s crucial to carefully consider the pros and cons, including potential drawbacks like rising debt and impact on future heirs.
Remember,
Reverse mortgages are not for everyone. Your broker will shop around and compare rates from different lenders to ensure you’re being represented well.
If further consideration is required, seek independent financial advice to understand how a reverse mortgage will impact your specific situation (accountant, financial planner, children/beneficiaries, etc.)
