I’m sure you’ve seen all the TV commercials on reverse mortgages, which is basically a way to take equity out of your home without any income, and without ever having to make a single mortgage payment.

Reverse mortgages are generally available to those aged 55 or older with significant equity in their homes. They can play a significant role in elevating the quality of life in your retirement years, while virtually eliminating financial worry, allowing you to enjoy a life of financial freedom.

They are primarily available to seniors, however, many are not aware that there could be similar options available to you regardless of your age.

But is this a golden opportunity? Or are reverse mortgages just a subtle trap?

Let’s take a deeper dive into how reverse mortgages work and explore the benefits they can offer. You’ll then be able to determine if they are truly as good as they sound, or if they should be avoided.

 

Understanding Reverse Mortgages

A reverse mortgage is a unique financial tool specifically designed to assist Canadians in accessing the equity in their homes without the need to sell or relocate. Unlike traditional mortgages which require monthly payments, a reverse mortgage will make payments to you. This is why it’s called a reverse mortgage. 

This means that as a homeowner, you can tap into the accumulated equity of your property to support your financial needs, whether it’s funding retirement, covering medical expenses, or fulfilling other goals. With a reverse mortgage, you have the flexibility to choose how you receive the funds – whether as a lump sum, regular payments, or a combination of both.

It’s an innovative solution that provides homeowners with greater financial freedom and peace of mind.

 

Benefits of Reverse Mortgages

A reverse mortgage can provide much needed financial assistance for seniors looking to supplement their retirement income, giving them financial flexibility to enjoy a comfortable and worry-free retirement.

Unlike traditional mortgages, where monthly payments can sometimes become a burden, a reverse mortgage eliminates the need for regular payments. This provides seniors with the peace of mind, giving them one less thing to worry about.

With a reverse mortgage, you can access a portion of the equity you’ve diligently built in your home over the years. This provides you with a valuable source of funds that can help out in many ways:

  • Eliminate financial pressure
  • Consolidate debt
  • Fund the purchase of real estate or other investment
  • Settle outstanding taxes
  • Provide financial assistance to children or grandkids
  • Assist kids or grandkids with a down payment on their first home
  • Allow for the provision of home care for a spouse
  • Offers additional financial resources after the loss of a spouse

 

In essence, a reverse mortgage transforms the equity in your home into a practical financial resource, enhancing your retirement years with greater financial freedom and peace of mind.

 

Disadvantages to a Reverse Mortgage

A mortgage where you never have to worry about paying back, or even making payments can be a breath of fresh air to many. It really can help to significantly improve the lifestyle for those in their retirement years.  But there are some disadvantages that need to be considered:

  • Decrease in home equity
  • High rates
  • Potential high penalty to break early
  • Reduced value of inheritance to heirs

 

Decrease in home equity

As no payments are required, interest continues to build and your outstanding balance continues to grow. The longer you’re in the reverse mortgage, the higher the balance becomes.

 

High rates

Rates on a reverse mortgage are generally around 1-2% higher than those of a traditional mortgage. The high rate means that a reverse mortgage may not be the ideal solution for everyone. However, for those who are unable to qualify for a traditional mortgage due to a limited fixed income, a reverse mortgage can be the perfect solution. It can be the difference between living your retirement years stressed out about money vs. living them without ever having to worry about money again.

 

Potential high penalty to break the mortgage early

If you choose to sell your home in the middle of the term, or refinance your reverse mortgage with another lender, then the penalty to break could be steep. It can be as much as 5% if you need to break it in the first year, but the further you get into the term, the lower the penalty becomes. Note that this can vary from one lender to the next.

 

Reduced value of inheritance

Taking out a reverse mortgage will affect the inheritance for your children, as the loan will need to be repaid from your estate, typically through the sale of the home. This means there would be less money available to leave to your kids.

You of course love your children and want to leave them as much as you can to help them out. But you also need to consider your own well-being. A reverse mortgage can significantly improve the quality of your life and happiness in your later years.

If you choose to discuss this with your kids before making the move, you might want to start out by informing them on the positive impact this will have on your lifestyle. I’m sure your kids will want you to be as happy as possible without having to worry about money.

 

Who is Eligible for a Reverse Mortgage?

When it comes to determining if you’re a candidate for a reverse mortgage, there are three crucial factors that come into play:

  • Your age
  • The equity in your home
  • The location of the home

 

Age

This is the primary starting point. Typically, you need to be at least 55 years old to qualify, but this can vary depending on the other two eligibility requirements. The older you are, the higher the potential loan amount.

 

The equity in your home

Equity refers to the portion of the home that you own outright and is equal to the value of your home, minus any outstanding mortgages or liens. For example, if you own a home valued at $1 million, and you owe $100,000, then you have 90% in equity.

A reverse mortgage will allow you to access as much as 55% of your home’s value, however, this can vary based on your age. For example, if you’re applying for a reverse mortgage at the minimum age of 55, then the total amount you’ll be eligible to borrow would be reduced.

 

The location of the home

The geographical location of your property is another important factor. The real estate market varies greatly across different regions of Canada, and these variations can affect the terms of a reverse mortgage. For instance, homes in urban areas with higher property values might yield more favorable reverse mortgage conditions compared to smaller regions.

For example, someone located in Toronto will generally be able to borrow a higher amount compared with someone living in Sudbury.

 

When Does a Reverse Mortgage Have to be Paid Back?

While you will never be required to make any payments on a reverse mortgage, it’s still not a magical pot of money that never needs to be repaid. There are three instances where you would be required to repay the loan:

  • When you say goodbye to the home
  • When you pass on
  • If you default on your obligations

 

When you say goodbye to the home

If you decide to pack up and sell the home, the loan will need to be paid from the proceeds of the sale.

 

When you pass on

We don’t like to think about it, but it’s a fact of life of course. When the last surviving borrower passes away, the reverse mortgage becomes payable in full. But don’t worry, this doesn’t mean that your heirs will be left scrambling. They have options such as selling the home or refinancing into a traditional mortgage. You generally have as much as 180 days to figure it out before the lender will expect to have the money returned to them.

 

If you default on your obligations

As there are no payments that will need to be paid on a reverse mortgage, the lender does not expect much from you. As long as you keep up with the payments on your property taxes, insurance, and general home maintenance, then the lender is a happy camper and would have no reason to demand the loan to be paid.

 

Myths About Reverse Mortgages

There are many common myths about reverse mortgages that leave some believing that they are a trap and should be avoided. This is a common occurrence whenever a topic isn’t wholly grasped by individuals, resulting in the propagation of false information and misguided beliefs.

Let’s tackle these common misconceptions head on:

 

Myth 1: You lose ownership of your home.

At no point would you lose ownership of your home with a reverse mortgage. The title stays in your name, keeping the ownership with you. Even when you pass away, the heirs have full control of what they want to do with the property. However, it’s important to note that the loan does need to be settled at that point.  They can choose either to sell the property or to refinance it into a traditional mortgage.

 

Myth 2: You can end up owing more than your home is worth.

This is also false. A reverse mortgage requires there to be a significant amount of equity left in the home at time of funding. This ensures that the balance of the loan doesn’t surpass the value of the home. In fact, there are some reverse mortgage providers who guarantee that you will never owe more than your home’s market value.

 

Myth 3: You have to pay taxes on the money you receive.

Another popular myth is that you will be taxed on the funds received from a reverse mortgage. Remember, this is still a loan where interest is charged. Even though you’ll be receiving a large sum of money, it’s not income, therefore it’s not taxable.

 

Myth 4: You can be evicted from your home.  

Providing that you comply with loan terms such as maintaining the property and paying your property taxes and insurance, you can live there as long as you want without having to worry about being given the boot.

 

Where to Get a Reverse Mortgage?

There is only a small handful of reverse mortgage providers in Canada. As each one can have their own unique benefits or advantages, it’s best to reach out to a mortgage professional knowledgeable on the subject.

That’s where we come in!

Applying for a reverse mortgage is a straightforward and hassle-free process designed to provide financial flexibility for homeowners. It begins with a consultation where we will guide you through the entire application process.

Our dedicated team will ensure that you have all the support you need to complete the necessary paperwork accurately and efficiently. We understand that navigating the world of reverse mortgages can be overwhelming, but rest assured, we are here to make the process as smooth and stress-free as possible.

 

Can You Get a Reverse Mortgage if you are Under the Age of 55?

If you contact any of the reverse mortgage providers in Canada, their answer will be no. However, there are alternatives that act very similar to a reverse mortgage, even though they may not be marketed as such. As long as there is enough equity in the property, there may be similar options available for those substantially younger.

If you’re under the age of 55 and are looking for an equity mortgage that requires no payments to be made, reach out to us and we would be happy to discuss your options with you.

 

Conclusion

Reverse mortgages can put seniors in a position of financial freedom and security when they may otherwise be struggling. With no income requirements and limited qualifying criteria, a reverse mortgage can be the perfect solution for many who are looking to ease the financial pressure.

If you or your parents are over the age of 55 and have equity in your home, our dedicated team is here to go above and beyond, offering not only more information but also personalized consultation tailored to your unique situation. Don’t hesitate to reach out to us via email or phone to embark on a journey of unlocking the full potential of your home equity, ensuring a secure and comfortable future.