Reverse Mortgage: Think it Through!
For many retirees, their primary residence is their biggest asset—especially since they've usually paid off their mortgage. If they don't have enough savings to cover regular and unexpected expenses, they can turn their home equity into cash without having to move.
With a conventional mortgage, loan payments increase the real value of your property. With a reverse mortgage, your home's net value gradually decreases as you withdraw its equity.
A Last Resort When You Need Cash
This solution is available specifically to Canadians aged 62 or over who want to stay in their homes as long as possible despite limited finances and aren't concerned about passing down their estate.
This option has been available since 1986 under the
Canadian Home Income Plan, which operates as a private corporation with shareholders. But be careful! Despite what some ads may lead us to believe, these mortgages are not part of the "Reverse Mortgage Program" by the Canadian government, which does not endorse the loans in any way.
How Does it Work?
The amount available ranges from 10% to 40% of the home's appraised value, depending on...
- Your age
- Your health
- Current interest rates
- Your property's value
- Your family situation
- The real estate market
A number of fees reduce the amount you'll receive through the Plan, including...
- The cost of an appraisal and title search
- Fees for any new mortgage (legal fees, appraisal report, location certificate, etc.)
- The cost of paying off your existing mortgage, if any, since the Plan requires a first mortgage
- Management fees
- A premium on the regular mortgage interest rate
You Should Also Know...
The older the borrower, the higher the percentage financing. The money you'll receive from your reverse mortgage can be used however you choose.
- Purchase a monthly pension with a tax-exempt capital
- Take the full value in cash
- Deposit it into a savings plan at your financial institution and plan systematic withdrawals as needed
- Any combination of the above
Since it's a mortgage loan, there are a variety of options available, including...
- Zero repayment until the borrower dies or moves out
- Transfer of remaining equity (if any) to the borrower's heirs
Taking out a reverse mortgage to free up your capital is not a bad idea in itself. However, the option is not available to all homeowners like the Plan claims, since some urban and rural areas are completely excluded. A reverse mortgage is also not right for all retirees. Be sure to get the facts and consult the experts if needed.
Advantages
- A reverse mortgage will increase your retirement income.
- The loan does not have to be repaid until the borrower dies.
- A reverse mortgage may be beneficial over the long term for an individual or couple in good health, although life expectancy remains a great unknown.
- If the property's value is higher when the loan expires, the owner can negotiate an extension and continue drawing an income on the remaining equity.
Disadvantages
- The Canadian Home Income Plan is not available at all financial institutions. Ask yours. 60% to 90% of the property's value is used to guarantee funding of 10% to 40% of the value.
- The net value of your property will fall as your loan rises.
- Some urban and rural regions are excluded from the Canadian Home Income Plan, which can limit your freedom to move.
- A prepayment penalty may apply if you pay your loan back early.
- The many legal and administrative fees add up. The mortgage rate is very high compared to a mortgage line of credit or a regular mortgage.
- If your assets are limited and you want an estate to pass down after you die, you'll find yourself mortgaging your beneficiaries' inheritance.
- Interest on a reverse mortgage is generally non-deductible.
- There's no monthly repayment, but you'll have to repay the loan in full if you sell your home.
Another Consideration
- Never take out a reverse mortgage to finance home renovations. Your financial institution can finance your project at a lower rate.