Canadians homeowners over the age of 55 are choosing reverse mortgages at a rapidly increasing rate. But are they the ideal solution to stretch a budget and generate cash flow? Or are they a slippery debt management slope with hidden costs and disadvantages? Like any lending product, the answer to these questions is different for everyone, but understanding how reverse mortgages work, along with their pros and cons, is the best way to determine if it’s something that could benefit your life and long-term financial well-being.
A reverse mortgage allows homeowners aged 55+ to leverage their equity as a source of income while they continue living in their homes. The very attractive icing on the cake is that there is no repayment – at all – until they sell their home or pass away. If this sounds too good to be true, it just might be. On the other hand, reverse mortgages offer homeowners facing financial difficulty several unique advantages.
Here’s how they work:
Where a conventional mortgage provides you with funds to buy a home, a reverse mortgage gives you funds from the home you already own to use as you see fit. In order to qualify for a reverse mortgage, you (and your spouse if you’re married and own the home together) must be at least 55 years old. While you don’t have to prove your income to qualify for the mortgage, how much you can actually borrow depends on your home’s condition, value and type, where you live, your age(s), gender(s) and how much debt you have.
To maintain eligibility, you’ll also have to agree to:
- Maintain the home to ensure equity continues to grow
- Remain in the house as your principal residence
- Pay property tax
- Keep valid homeowners insurance in place
In terms of the costs, there are fees for setting it up and interest rates are higher than a conventional mortgage or secured line of credit.
Interest is calculated daily, added to the loan balance monthly and paid in full when the loan matures. A reverse mortgage loan is considered to mature when:
- Your home is sold
- You and/or your surviving partner move out of the home
- You or your surviving partner pass away
Your reverse mortgage can also be revoked if you’ve failed to keep the home in good repair or haven’t paid your property taxes and homeowner’s insurance. Under these circumstances, the loan plus interest must be paid back immediately.
Benefits Of A Reverse Mortgage | Drawbacks Of A Reverse Mortgage |
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If you’re feeling financially unprepared as you approach retirement, you’re not alone! Older Canadians are finding themselves burdened with debt as they head into retirement and it’s hard to manage that on a fixed income. Reverse mortgages are not the first recommendation for the majority of situations primarily due to very high fees and interest rates, as well as the limitations this type of mortgage has associated with it. A common recommendation is to first explore other options such as traditional mortgage financing, potentially downsizing, or decreasing expenses through budgeting. A reverse mortgage is far from the only option. While a reverse mortgage may seem ideal on the surface, it can be risky. It’s a good idea to explore options with your Rapport financial advocate who can give you a big-picture view of what’s best for your unique situation.
The financial advocates at Rapport are here to help you do just that. Your financial wellness is our number one priority and we’ll help define a path that moves you forward without compromising your financial health long term.