You would not be the first person to ask the question, what is a reverse mortgage? In the past several years, advertisements of this product has been increasing steadily. Financial institutions have been touting it as an alternative way for those who are 55 years or older to access retirement income by way of the equity that has built up in their home, to get paid a monthly income, interest free and tax free.
In this post, we will mainly share information from the Government of Canada about what is a reverse mortgage. We always recommend that you consult with a mortgage professional and seek independent legal advice about the benefits and disadvantages of this product.
Quoted below, the Government of Canada provides a clear and precise description of what is a reverse mortgage:
It is a type of loan for homeowners, usually aged 55 or older. It allows you to borrow money from your home equity without selling your home. You may do so by converting a portion of your home equity into tax-free money. Financial institutions sometimes call this “equity release.”
You may usually borrow up to 55% of the current value of your home. This money doesn’t affect the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting.
The maximum amount you may borrow depends on:
• your age and the age of other individuals registered on the title of your home
• your home’s condition, type and appraised value
• your lender
Who can be approved for a reverse mortgage?
To be eligible, the home you’re using to secure a reverse mortgage must usually be your primary residence. This typically means you live in the home for at least 6 months a year.
You have to be 55 years of age or older.
Nothing is free!
As good as it sounds, there are costs to getting a reverse mortgage that you must be aware of and have a clear understanding about it. Again, that’s why it is important to consult with a mortgage professional and seek independent legal advice.
On the Government of Canada’s web site, they provide information about the costs. Here they are:
The interest rate is usually higher than the interest rate for a:
- mortgage
- home equity line of credit (HELOC)
Your lender adds your interest costs to your reverse mortgage. This means that the total amount you owe increases over time.
Other costs associated with this type of a lown may include:
- home appraisal fees
- set-up fees
- prepayment penalties if you pay off your reverse mortgage before it’s due
- legal fees
- closing costs
These costs may vary depending on your lender.
Your lender may add the fees to the balance of your reverse mortgage. You may have to pay for other fees up front. Ask your lender about the fees that apply to your loan.
How you get your money from a reverse mortgage also impacts your costs.
You may get your money from a reverse mortgage as:
- a lump-sum for the entire amount
- a lump-sum for part of the reverse mortgage and the rest over time
- regular payments
Is a reverse mortgage right for you?
It depends on different factors. This product may not be for everyone. For example, if your home value compared to its outstanding mortgage balance is low, this type of a loan might not be the best option. If you are planning to sell your home or pay back the loan in a short time frame, less than 6 to 7 years, it may not be the best option, as the lenders premium or penalty would be high if you pay back the loan in a shorter period.
However, if you are looking at, for example, a 10-year time frame of receiving regular payments, then the premiums to pay back the reverse mortgage are reduced and very minimal. There are other factors to consider too that can be different for each borrower. Contact us to learn more and find out if this product is the right fit for you.