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.
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.
| Mortgage Paid Off | $450,000 |
| Current House Value | $600,000 |
| Maximum You Can Borrow Through A Reverse Mortgage (55% of $600,000) | $330,000 |
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:
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.
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.
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.
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.
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:
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:
When you apply for a reverse mortgage, lenders will look at the following when assessing an applicant:
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.
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.
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.
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 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.
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.
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