If you're a homeowner aged 55 or above in need of money, you may want to consider a reverse mortgage. Reverse mortgages in Canada are a great way for home-owners to access funds to cover living costs, travel, and other expenses. And one of the biggest benefits of this type of financial solution is that you won’t need to make monthly payments.
In this article, we’ll take a deep dive into reverse mortgages in Canada for 2022. We'll look at what a reverse mortgage is, go over some pros and cons of reverse mortgages, and also look at how you can decide whether or not a reverse mortgage is right for you. So, if you're looking for more info about reverse mortgages, read on.
What is a reverse mortgage?
Let's begin with a simple definition of what a reverse mortgage is and how it works. As you might be able to infer from the name, a reverse mortgage is a lot like a traditional mortgage. Instead of being used to buy a home, it's used to take out money against the value of your existing home.
In simple terms, a reverse mortgage is a loan that is secured by your home. It allows you to receive up to 55% of your home's current value. In addition, unlike a typical personal loan or line of credit, you don't have to make regular repayments on a reverse mortgage.
Usually, the repayment terms are quite flexible. You can choose to pay off the interest, make payments towards both interest and some of the principal. You can also pay nothing at all until you're ready to pay off the whole loan when you sell your home and move somewhere else.
In addition, you don’t necessarily ever need to pay back the money you owe on a reverse mortgage. You can take out the mortgage, spend the money, and stay in your house until you die. After that, the house will be sold and the lender will get the money back. If not, your estate and inheritors assume the debt. They’ll decide to pay it off or sell the home to pay it back.
An example of a reverse mortgage
An easy way to understand how a reverse mortgage works is to look at an example. So, let's say that a couple in their sixties own their own home and have paid off the initial $350,000 mortgage they took out when they bought it. Now, thanks to inflation and rising house prices, the home is valued at $600,000.
The couple wants some extra money so that they can enjoy their retirement and go traveling together. They can take out a reverse mortgage of up to $330,000, which is 55% of the $600,000 value of their home. The homeowners make flexible repayments in a way that works for them. They can choose to wait and pay off the whole sum in one shot.
The advantages of a reverse mortgage
- Keeping the home: In retirement, many people sell their homes and downsize. They use the extra money to fund their retirement lifestyle. A reverse mortgage lets you stay in your current home. The lender cannot force you to sell or leave your property. All you have to do is keep paying the regular costs like taxes and insurance.
- Flexible repayments: When you choose a reverse mortgage, you decide how and when you want to pay it off. Unlike with a regular loan or mortgage, you don't have to make monthly payments. You aren't required to pay off the interest regularly, either. You can pay in a way that works for you, even opting to wait and pay off the whole thing when you sell your home in the future.
- Convenience – Many people appreciate the convenience of a reverse mortgage. It allows you to enjoy your retirement years, pursue your plans, and have enough money to cover various costs without a repayment schedule. As long as you live in your home, the lender can't force you to do anything and won't require any payments from you.
- A significant increase in cash flow: Of course, one of the biggest benefits of a reverse mortgage is that it substantially increases your cash flow. You can borrow hundreds of thousands of dollars. It can completely transform your retirement lifestyle. This money can be used however you like.
The disadvantages of a reverse mortgage
- High-interest rates: One of the downsides of reverse mortgages is that they can have very high-interest rates. This is especially true when comparing them to a home equity line of credit (HELOC). Every month, costs accumulate that you need to pay back. So, whent he time comes to pay off the loan, you can find yourself ending up with less money than you expected.
- Variable rates: Not only can interest rates be high with reverse mortgages, they can also change. These are variable rates. They can decrease or increase over time . You have no control over what happens. So, the rate you get when you first sign up for the loan will not necessarily remain the same for the duration of the time you borrow the money.
- Flexible payments can cause problems: In a way, a reverse mortgage's flexible repayment structure can be a downside. Many people who take out reverse mortgages decide not to make any payments and simply wait to pay off the whole debt when they sell their home. However, because of changing interest rates, you can end up paying far more than you initially expected. This is especially true if you wait many years before paying.
- Inheritance issues: It's also worth considering your potential heirs and their inheritance before committing to a reverse mortgage. If take out a reverse mortgage, your heir could end up inheriting that debt when you pass away. They might have to sell the home to cover the costs. In the end, they inherit a fraction of what you originally hoped to leave behind.
Things to consider before choosing a reverse mortgage
- Think about your options: It's important to note that if you need money during your retirement, a reverse mortgage is just one of many options available to you. There are many other financial services and solutions out there, like personal loans and HELOCs. These can offer more attractive terms and rates.
- Compare providers: Whenever you're taking out any kind of mortgage or loan, it's important to compare providers in order to find the best option to suit your needs. There aren't many financial institutions offering reverse mortgages in Canada, but there are still a few, so make sure you take the time to compare them.
- Evaluate your situation: You also need to think carefully about your own situation and evaluate why you need this money. What do you plan to do with it? How will you repay it?, What do you want to do with your house in the future, and so on. Reverse mortgages are useful for people who want to travel and have adventures, It can also be very useful for paying day-to-day costs or covering the costs of 24-hour care.
- Be aware of your obligations: Before you take out any kind of loan, you must understand what is expected of you. Make sure that you are aware of any fees you need to pay. Be certain of the the interest rate, the repayment system, and what will happen to your debt if you pass away.
- Get family involved: Your heirs will inherit your debt. More than that, family homes often hold great importance to others. Bring family members into the discussion around a reverse mortgage. Ultimately, the decision is always the homeowner's. However, speaking with other family members provides peace of mind and ensures that everyone is aware and up-to-date with the situation.
Is a reverse mortgage right for you?
As you can see, reverse mortgages have several advantages. They also have downsides you need to consider. It's important for anyone thinking of taking out a reverse mortgage to weigh up these pros and cons and take their time before making a decision.
A reverse mortgage could be right for you to bring in extra money and make your retirement more enjoyable and comfortable. However, it isn't always the best option for everyone. You will need to think about things like inheritance and your future plans before making an application.