Sometimes Canadians, usually older Canadians, who’ve paid off their homes find themselves house-rich but cash-poor. This means, despite having a valuable asset, these Canadians struggle with their cash flow. Thankfully, a reverse mortgage can help Canadians tap into their home’s equity and access extra cash.
What Is A Reverse Mortgage?
A reverse mortgage is a loan that uses your primary home as collateral. It allows you to convert a certain amount of your home’s value into tax-free cash that you can use for a variety of reasons.
In general, you’ll be able to borrow up to 55% of your home’s value, though the maximum amount you qualify for will depend on your age, your home’s appraised value and the lender you choose to work with.
How Much Can You Borrow Through A Reverse Mortgage?
| Mortgage Paid Off | $450,000 |
| Current House Value | $600,000 |
| Maximum You Can Borrow Through A Reverse Mortgage (55% of $600,000) | $330,000 |
How Does A Reverse Mortgage Work?
When you take out a reverse mortgage, you’ll retain ownership of your home and you won’t be obligated to make any payments until your mortgage is due. In general, your mortgage becomes due when:
- You move out
- You sell your home
- Your (the borrower) dies
Note – Your mortgage may also become due if you do not adhere to your loan agreement such as paying your property taxes, maintaining your home and paying home insurance.
How Is Interest Calculated On A Reverse Mortgage?
Interest on a reverse mortgage is typically higher than a traditional mortgage. Interest is charged on the balance you owe each month. This means you’ll accrue interest on your principal balance as well as the interest charged each month. It is likely you’ll have less equity in your home at the end of the mortgage.
Can You Get A Reverse Mortgage If My House Isn’t Paid Off?
Reverse mortgages must be in a first lien position, as such your house must be paid off before you can apply for a reverse mortgage. However, you may still be able to qualify if you use the funds to pay off the existing mortgage.
What Happens If The Reverse Mortgage Amount Is Higher Than The Property’s Value?
The consequence of your reverse mortgage loan growing higher than your property value depends on the lender you work with. However, some lenders will guarantee that you’ll never owe more than the fair market value of your property. Be sure to ask your lender what happens if your home value falls.
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Reverse Mortgage Fees To Consider
A reverse mortgage is a lot like a traditional mortgage when it comes to fees. Some fees must be paid upfront, while some may be added to your loan amount. Typical costs associated with reverse mortgages include:
- Interest
- Home Appraisal Fee
- Set-up Fees
- Legal Costs
- Closing Costs
- Prepayment Fees
Who Is Eligible For A Reverse Mortgage?
Before you can consider a reverse mortgage, it’s important to understand that this financial product is only available to homeowners who are 55 years and older. Moreover, you’ll need to meet the following requirements:
- Primary Residence – A reverse mortgage can only be taken out on your principal residence. You usually must live at the primary residence for at least 6 months each year to be considered eligible.
- All Homeowners – Anyone listed on your home’s title must be included in the mortgage application. Moreover, these individuals must also be 55 years of age or older.
Factors Lenders Consider
When you apply for a reverse mortgage, lenders will look at the following when assessing an applicant:
- Available Equity – You’ll need to have a certain amount of equity already built up in your home. Generally, lenders prefer your home to be paid off as it must be in a first lien position. However, some lenders may still qualify you if your remaining mortgage balance is very low or if you use the funds from the reverse mortgage to pay off your current mortgage.
- Home Condition – Your lender will look at your home’s appraised value, where you live and what the home’s condition is in.
Pros And Cons Of A Reverse Mortgage
While reverse mortgages are beneficial in that they allow you to take advantage of your home’s equity without having to take out a traditional loan, there are also some disadvantages. Let’s look at some of the pros and cons of a reverse mortgage.
Pros
- No Payments – No payment is required until the mortgage is due.
- Extra Cash – Reverse mortgages let you take advantage of tax-free cash without having to sell your home.
- Keep Profits – If your home appreciates in value, you get to keep the profits when you sell the house.
- Doesn’t Affect Benefits – Any money you get from the reverse mortgage won’t affect your OAS or GIS benefits.
Cons
- High-Interest Rate – Reverse mortgage rates have higher interest rates compared to traditional mortgages.
- Fees – Like a traditional mortgage, reverse mortgages have similar fees such as start-up fees, legal fees, closing costs and more.
- Lower Equity – Home equity can decline as interest accumulates on the loan.
- Smaller Inheritance – After death, your estate is responsible for paying your loan. This may reduce the money left in your estate after your death, thus leaving your beneficiaries with a smaller inheritance.
- Not Offered By All Lenders – Reverse mortgages aren’t offered by all lenders
How To Apply For A Reverse Mortgage?
- Apply Online – You can apply for a reverse mortgage by submitting an application online. You’ll need to provide some details regarding your personal and financial situation. You can also usually get a quote on how much you can borrow without any obligation.
- Underwriting Process – Once your lender receives your application, they’ll reach out to you to learn more about your situation. They’ll want to know if you have any loans that use your property as collateral. They’ll also require an appraisal of your property to assess how much your qualify for.
- Approval – Once you’re approved, you can choose to receive your payment in one lump sum or as reoccurring payments.
- Repay Loan – Once you get your loan, you won’t have to make any payments until you either pass away, move or sell the home.
How To Pay Off A Reverse Mortgage?
Reverse mortgages can be paid off in a number of ways. Here are the most common ways on how to pay off a reverse mortgage.
Paying It Off Early
Regular payments on a reverse mortgage are not required. Instead, you can repay the principal and interest at any time. That said, you might be charged a fee if you choose to repay your reverse mortgage in full early.
Sell The Property
The most common way to repay a reverse mortgage is by selling the property. The proceeds of the sale can then be used to pay off the loan amount in full, and after the mortgage is paid, any remaining equity in the property can be kept.
If Your Die
If you pass away, your heirs will be responsible for paying off the loan amount. Again, the most common way that a reverse mortgage is paid off in this circumstance is to sell the home and use the sale proceeds to repay the reverse mortgage amount. At the end of the day, the only way that you can get out of a reverse mortgage is if you sell your house or pass away if you’re unable (or your heirs are unable) to come up with the funds needed to pay it off in full.
Additional Reading
Reverse Mortgage FAQs
How much can I borrow through a reverse mortgage?
Can I get my reverse mortgage as one lump sum payment?
Do I still own my home if I get a reverse mortgage?
Can I get a reverse mortgage if I already have a mortgage on my property?
Can I pay off my reverse mortgage early?
Bottom Line
A reverse mortgage is a great way for individuals and couples to plan for their future and for retirement. But, one of the biggest benefits of this type of financing is that you can use the money for any current or future expenses you come across. Whether that’s to pay down debt, renovate your home, or travel, a reverse mortgage can help you achieve your goals and cover the costs of any expenses along the way.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
