Pros and Cons of Reverse Mortgage
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One concern that many Canadians have, especially as they approach their retirement years is “will I run out of money?” For many, the answer will be no. For others, they will likely have to work for longer than they expected, or else curb their spending expectations, or both.
For those that own their homes with a small or no mortgage, who are finding that they are short of cash flow; there are options available to allow them to release some of that house’s value (or equity). One of which is to take out a reverse mortgage.
The Government of Canada defines a reverse mortgage as “a loan that allows you to get money from your home equity without having to sell your home.” Essentially, this means that you are borrowing a certain percentage of the current value of your home. The government site then goes on to explain that “the maximum amount you will be able to borrow will depend on your age, your home’s appraised value and your lender.”
To be eligible for a reverse mortgage, you must be at least 55 years old, and the property you’re borrowing against must be your primary residence. There are two companies in Canada that provide reverse mortgage lending. They are Home Equity Bank, which offers the Canadian Home Income Plan (CHIP) and Equitable Bank which offers the PATH Home Plan. When they are considering you for a reverse mortgage, they will ask things like, you and your spouse’s age, where you live, what kind of condition your house is in, and when it was most recently appraised.
When you are approved for your reverse mortgage, you can access the money either through a one- time lump sum payment, or by taking some money now while taking the rest in increments over time. The lender will require you to pay off any outstanding loans or lines of credit that are secured against your home, but once that is done, you can use the remainder of the money for whatever you choose; for example, to pay bills, debts, or even to invest.
There are no regular payments on a reverse mortgage; however, at some point you will need to pay the loan back plus accumulated interest. You can pay back the principal and interest in full any time you like, although sometimes reverse mortgage companies have additional fees for paying them off early (i.e. read the fine print). Alternatively, people typically pay back the loan when they pass away or when they sell their house, at which time the loan and interest must be repaid in full.
There are costs that are important to consider when thinking of applying for a reverse mortgage. Typically, you pay a higher interest rate than for a traditional mortgage, and since you don’t pay back the loan for potentially a long period of time, those interest costs can really eat into the future equity of your home. In addition, you may also find yourself paying a set-up fee, a home appraisal fee, and perhaps other fees. Consider fees for independent legal advice for example. You’ll want to make sure that you fully understand how a reverse mortgage works, which we can help you with at LGK Wealth Management; however, it is important to understand the contract that you will be signing as well.
There are complex terms and conditions that exist within that reverse mortgage contract and as a result, getting independent legal advice is very important for a big decision like this. And don’t forget, a reverse mortgage is not your only option. Consider whether a different type of loan, a secured line of credit for example, might be a better or cheaper option. Besides borrowing and paying the interest and fees that go with it, perhaps you may want to consider selling your current home and buying something smaller, or even renting. You could even use this as an opportunity to consider your future health needs. Although not always the most pleasant thing to think about, this may be a good time to look into a residence that either has assisted living, or has a combination of independent living with assisted living in case you need it down the road.
Regardless, you have a lot of options, and it’s definitely worth considering the costs and benefits of all of them before making a decision on whether to take out a reverse mortgage. At LGK Wealth Management, we’d like to help you consider your options.