The value of residential real estate in many parts of Canada has rocketed in recent years leaving some long-time homeowners with significant equity in houses they bought when prices were substantially lower.
Homeowners (55-plus) can tap into that equity through a reverse mortgage – without having to sell their home. Unlike a typical mortgage, a reverse mortgage does not have to be repaid until the house is sold. In the meantime, interest on the loan accumulates and is added to the initial amount.
The maximum you will be able to borrow will depend on your age, your home’s appraised value and your lender. In general, according to Canada’s Consumer Protection Agency (CPA), the older you are and the more home equity you have when you apply for a reverse mortgage, the more money you could access.
To be eligible, you must be a homeowner and at least 55 years old. If you and a spouse are both on the title for the home, both of you must be at least 55 and listed on the application.
The home you are using to secure a reverse mortgage must be your primary residence, which usually means you live there for at least six months a year. If you have an existing mortgage on your home, you must pay it off when you get a reverse mortgage.
The money accessed from the reverse mortgage can be used for anything, including home improvements, monthly living expenses, health-care costs and paying off debts.
CPA cautions that you may not be able to take out another loan secured by your home, such as a home equity line of credit, if you have a reverse mortgage. While you have the option to repay the principal and interest in full at any time, you may be charged a fee to pay off early.
When you die your estate will have to repay the entire amount owing on the loan. If both you and your spouse own your home together, the loan will have to be repaid when the last one of the couple dies or sells the home.
Yvonne Ziomecki, executive vice president, marketing and sales at HomeEquity Bank says reverse mortgage clients are typically 65 and older, want to age in place and need the funds for a variety of reasons.
“A large proportion of reverse mortgage clients use the funds to pay out various debts including mortgages, loans, lines of credit and private loans. Many also use the funds to supplement their income, to pay for private healthcare , to gift money to family and to renovate or adapt their current home to better suit them in retirement,” she says.
When considering a reverse mortgage, homeowners should evaluate their personal situation and decide what is important to them, adds Ziomecki. They should involve all the key people in these discussions including children and financial planners.
CPA says the pros and cons should be considered before applying for a reverse mortgage.
The pros include: No regular loan payments; Turning equity in your home into cash without having to sell it; No tax on the money you borrow; The loan does not affect Old-Age Security or Guaranteed Income Supplement benefits; You still own your home.
The cons include: Higher interest rates than most other types of mortgages; The equity in your home may go down as the interest on the loan adds up; Your estate will have to repay the loan and interest in full within a set period after you die; The time needed to settle an estate may be longer than the time allowed to repay the loan; There may be less money in your estate to leave to your beneficiaries; Costs associated with a reverse mortgage may be higher than a regular mortgage.
Copyright Postmedia Network Inc., 2019