Wipe Out Your Mortgage Payments
Let’s Talk About A Reverse Mortgage
One of the fastest-growing mortgage productions in Canada, a Reverse Mortgage has allowed thousands of Canadian homeowners to access their home equity to supplement their retirement.
A Reverse Mortgage in Canada is a mortgage tailored for senior homeowners aged 55 and older. It offers an opportunity to tap into the equity built within your primary residence while allowing you to continue living in your home. Unlike a traditional mortgage where borrowers make monthly payments, a reverse mortgage can have NO mortgage payments and instead provide funds to the homeowner as a lump sum, a periodic payment, or a combination of both.
For nearly all borrowers, credit and income do not factor, or play a very limited role, in the lending decision which opens the door for those sitting in “Equity Rich” positions in their home.
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How does a Reverse Mortgage Work?
With a Reverse Mortgage, there is no requirement to make a regularly scheduled payment. Instead of making payments like a traditional mortgage, borrowers can choose to receive funds in a lump sum, or in regular payment amounts.
Interest accumulates on the borrowed amount, increasing the loan balance over time. Repayment becomes due when the homeowner sells the home, moves out, or passes away. At that point, the loan, plus accrued interest, is settled through the home's sale. The loan amount is determined by factors like the homeowner's age, property value, and prevailing interest rates.
Perhaps Most Importantly…
...with a Reverse Mortgage, you will always maintain your home and maintain title. You will never be forced to sell your home even if your home Value or income changes.
The Reverse Mortgage product guarantees that the amount of mortgage that will be repaid will never exceed the fair market value of your home at the time it is sold.
So what can you use a Reverse Mortgage for?
Technically, just about anything you want.
A Reverse Mortgage offers complete flexiblity in accessing the equity in your home to use as your see fit.
Some of the top reasons Canadians use Reverse Mortgages:
Paying off existing, traditional payment mortgages
Home Renovations
Debt Consolidation
Travel & Leisure
Estate Planning
Helping Family Members (eg. Early Inheritance)
Supplementing Retirement and/or Other Pension Income
Reverse Mortgage versus HELOC
A product of similar use is a Home Equity Line of Credit (HELOC).
With a HELOC you are approved to a borrowing limit and can access those funds at any time to use as you see fit.
THE KEY DIFFERENCE?
With a HELOC you are required to make payments for any balance owing, and your credit and income will factor into lending. Qualifying for a HELOC follows traditional income and credit guidelines that prove difficult for retirees to satisfy.
Benefits of a Reverse Mortgage
Supplement Retirement Income:
A reverse mortgage allows Canadian homeowners to access a portion of their home equity in tax-free cash. This additional income can help supplement retirement funds, cover living expenses, and enhance the quality of life during retirement.
No Monthly Mortgage Payments:
With a reverse mortgage, borrowers are not required to make monthly mortgage payments. This can be beneficial for seniors on fixed incomes who may find it challenging to manage regular mortgage payments or are seeking to reduce their financial obligations. You may also have the ability to make “interest-only payments” - meaning you can actively manage your mortgage balance should you choose to. If there was a situation where you went on an extended vacation you could elect to not make mortgage payments during that trip and then get back onto a payment schedule once you’ve returned.
Retain Home Ownership:
Canadian homeowners who take out a reverse mortgage can continue to live in their homes as long as they fulfill their obligations, such as maintaining the property and paying property taxes and insurance. Retaining ownership provides stability and comfort, allowing seniors to age in place and maintain their independence.
Flexibility in Fund Usage:
The funds obtained from a reverse mortgage in Canada can be used for various purposes such as paying for healthcare expenses, funding home repairs or renovations, covering daily living costs, or even supporting family members. The versatility of fund usage makes it an attractive option for those with specific financial needs. As the value of the property appreciates, the access to funds also increases for the borrower. No Negative Equity Guarantee: In Canada, reverse mortgages come with a "no negative equity guarantee."
Often Overlooked:
While your mortgage balance may grow, the value of your home may also continue to grow during that same time, potentially offsetting and equity loss.
No Negative Equity Guarantee
In Canada, there is a No Negative Equity Guarantee, meaning the borrower or their estate will never owe more than the fair market value of the home when it is sold, even if the loan balance exceeds the home value. This feature provides security and peace of mind for both the borrower and their heirs.
Age:
Eligibility Requirements
Property Type:
You (or at least one homeowner if applying jointly) must be at least 55 years old. Some lenders might require a higher age threshold.
Property Value:
The property needs to meet the lender’s minimum value requirements. This requirement can vary among lenders.
Equity:
You should have a certain amount of equity in your home. This might involve owning your home outright or having a significant portion of equity relative to any outstanding mortgages or liens.
Financial Assessment:
While credit scores and income aren’t typically considered for eligibility, some lenders might conduct a financial assessment to ensure you can fulfill ongoing obligations like property taxes and insurance.
Independent Legal Advice:
Before obtaining a reverse mortgage, Canadian law mandates that you undergo independent counseling from a qualified third party. This counseling helps ensure you understand the terms, costs, and potential implications of the reverse mortgage
Title and Legal Requirements:
You must have clear title to the property, and any existing mortgages or liens on the property should be paid out using the reverse mortgage funds.
The property must be your primary residence, where you live for the majority of the year. Vacation homes or rental properties usually do not qualify.
Property Location:
Reverse mortgages are typically available for properties in urban and suburban areas. Rural properties might have different eligibility criteria.
Important Considerations and Risks
A reverse mortgage in Canada, while offering financial benefits, is a complicated product that unless fully understood can present serious risk to the borrower entering this Mortgage product. Here are some important considerations to make when assessing whether a Reverse Mortgage is right for your situation:
Accruing Interest:
Interest accumulates on the borrowed amount over time, leading to a growing loan balance that can reduce the remaining home equity and impact potential inheritance. This is essentially the definition of the product: your mortgage can and likely will increase over time.
Reduced Home Equity:
As the loan balance increases, your home equity decreases, potentially limiting your ability to access funds for other purposes or leaving less equity for future needs.
Cost and Fees:
Reverse mortgages entail upfront costs such as appraisal fees, legal fees, administrative charges, and insurance premiums, which can decrease the overall amount you receive from the loan.
Impact on Inheritance:
The growing loan balance might reduce the inheritance you intend to leave for your heirs, potentially affecting their financial security.
Housing Market Fluctuations
If your home’s value decreases over time, you could end up with less equity than expected when it’s time to repay the loan.
Higher Interest Rates:
Interest rates for reverse mortgages tend to be higher than those for traditional mortgages, leading to a faster growth of the loan balance.
Potential for Misuse:
If the funds from the reverse mortgage are not managed prudently, you could exhaust your home equity prematurely and face financial challenges later