If you’re a homeowner, you have more benefits than just owning a valuable asset to call home that helps build wealth over time. Homeownership can also afford you with the ability to tap into your home’s equity if you are ever in need of extra cash. While there are a few ways to access your home’s equity, a reverse mortgage is a unique one.
Reverse mortgages allow you to convert a certain amount of your home’s value into money that you can use for a variety of reasons, without being subject to paying taxes on that withdrawn cash. Whether you’re looking to renovate your home, take an extended holiday, or cover the cost of your adult child’s college education, the money you access from your home’s value can come in really handy.
Let’s look deeper into reverse mortgages to see if they’re right for you.
What is a Reverse Mortgage?
A reverse mortgage is a long term solution to your financing needs. You’ll use the equity you’ve built up in your home to gain access to either a one-time advance or recurring advances of cash. You retain ownership of your home but won’t need to make payments until your mortgage is due.
How Does a Reverse Mortgage Work?
Before you can consider a reverse mortgage, it’s important to understand that this financial product is only available to those who are 55 years and older. You’ll also need to have a certain amount of equity already built up in your home. More specifically, most lenders require a minimum equity amount of 50%, which represents your home’s value minus whatever you still have left on your mortgage or any liens on title. Whatever remains is your equity, or the amount that you own outright.
If you meet the age and equity requirements, you can convert as much as 55% of your home’s value into tax-free money that can then be used as you see fit. You still retain ownership of your home with a reverse mortgage, and you won’t be subject to any additional mortgage payments. Instead, the loan will only have to be repaid if you move or sell your home or when you die.
If the value of your home increases, you can still benefit from added equity in your home as a result. All you’ll need to do is continue maintaining your property, paying property taxes, and paying property insurance.
Looking for more information about how to build home equity? Check out this article.
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.
- Take advantage of tax-free cash
- Access up to 55% of the value of your house
- No payment is required until the mortgage is due
- Keep your home
- Repay the loan at any time
- Appreciation is yours if the value of your house increases
- Won’t affect OAS or GIS benefits
- Higher interest rate compared to traditional mortgages
- Start-up fees can be high
- Home equity can decline as interest accumulates on the loan
- After death, your estate will have a certain time limit when the loan must be paid off
- There will be a reduction of money left in your estate after your death
- Reverse mortgages aren’t offered by all lenders
How to Qualify For a Reverse Mortgage?
In order to qualify for a reverse mortgage, you need to be a Canadian homeowner and 55 years of age or older. Aside from this, there are a few factors that most reverse mortgage lenders will take into consideration, including:
- Value of house
- Type of house
- Home equity
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 before this time, 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.
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Always Ask Your Reverse Mortgage Lender These Questions
Before you take out a reverse mortgage, there are certain important questions that you should ask the lender first, including the following:
- How much are the fees associated with a reverse mortgage?
- What is the interest rate?
- What are the early payment penalty fees charged?
- Are there any penalties if I sell the home?
- How will the funds be made available?
- How much time do my heirs have to pay off the balance of the mortgage if I pass away?
- What happens if the loan amount is higher than the property’s value when it’s time to repay the loan?
Use a Reverse Mortgage to Plan For Your Future
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.