Gaining access to the housing market in Canada also means becoming familiar with specific terms coined to describe certain intricacies of the financial system. While traditional mortgages may already be pretty common knowledge, there are still a few things to be said about reverse mortgages.
How Can They Be Useful?
The main aspect of reverse mortgages is that they are a way for seniors to use their home equity to get cash, without the burden of monthly payments. While the entire concept may sound pretty good, there are still a few things to consider before deciding on whether or not to go for it.
What Is The Catch?
This kind of loan presents some drawbacks which should be assessed carefully.
For one, you’ll have to pay a hefty fee just to get access to the money and, depending on how much money you receive, this fee may be quite large.
Then, although reverse mortgages don’t require regular payments, you’ll still have to repay your loan upon refinancing, or when selling the property.
Another important consideration is that if you want a reverse mortgage, you will need your home’s value to skyrocket over time. This is because the amount of money that will be paid out as an interest-free loan will depend on its value after it has been refinanced.
In conclusion, reverse mortgages are a good alternative for those who don’t want to deal with the hassles of making regular payments on a loan. They are also convenient for those who want to live comfortably in their senior years and have enough cash to do so.
However, there are still a few things to consider before deciding if this kind of loan would be appropriate for you.
Benefits Of Reverse Mortgages
There are plenty of benefits that come with reverse mortgages, including:
No Monthly Mortgage Payments
One of the biggest benefits is that monthly mortgage payments are optional. You will also have access to all the equity in your home without having to sell it. Reverse mortgages don’t have to be repaid until you sell or permanently leave the home, pass away, or fail to honour your loan terms.
The Money You Borrow Is a Tax-free Source Of Income
The money loaned to you is a form of income that you can use for whatever you want, without being considered taxable income, which means you don’t have to pay taxes on it.
It Allows Seniors To Stay In Their Homes
Many seniors living on a fixed income cannot afford their current living expenses. If they didn’t have a reverse mortgage available, they might be forced into assisted-living facilities or nursing homes.
Reverse mortgages allow these seniors to stay in their own homes and live there as long as they want without any monthly payments.
You Can Decide How You Want To Receive The Money
Seniors who qualify for a reverse mortgage loan can decide to have the money deposited into a checking account or have it paid out as a lump sum.
The Downsides Of Getting a Reverse Mortgage
As with most things in life, there are some downsides to getting a reverse mortgage loan.
High Costs
Depending on the type of reverse mortgage you apply and qualify for, you may need to brace yourself for serious fees and interest rates that actually take away from the homeowner’s equity.
Apart from this, the loan proceeds from a reverse mortgage may not cover your typical mortgage insurance premium, property taxes and home maintenance costs. As you can imagine, a failure to honour these costs may result in losing the home. This is one of the reasons why reverse mortgages aren’t for everyone, after all.
Decreasing Equity
The equity you hold in your home will decrease as the interest on your reverse mortgage accumulates over time. In many cases, this can be a significant amount of money!
One of the biggest concerns that many senior homeowners have is how to pay for their homes once they retire. With that in mind, it is important to keep your home equity as high as possible while you are still working so that you don’t have to use the money from your reverse mortgage loan.
If You Live With Someone Else
When you live with someone else, things also get a bit more challenging. If the borrower dies, those living in the house that aren’t included on the loan’s paperwork may end up on the street.
Your Heirs May Not Be Able To Pay Off The Mortgage
Reverse mortgages aren’t easy on the borrower’s heirs either. In the event of the borrower’s passing, the heirs will be responsible for paying off the reverse mortgage. The payment can usually be done with either their own funds, funds from your estate, or proceeds from the sale of the home.
If You Have Medical Problems
The loan is only valid if the borrower’s said home qualifies as their principal residence.
If the reverse mortgage borrower moves away for medical reasons — for example, to a nursing home — leaving their own home for over 12 months, then there must be a full loan repayment.
The Private Alternative
Getting approved for a reverse mortgage from a bank can be difficult.
The two banks which offer reverse mortgages in BC, Canada (Equitable Bank and Home Equity Bank (HEB)) only approve borrowers with an income surplus each month that’s more than what they pay on their loan payments and bills — even if it’s just a small amount.
To meet these criteria, your household needs to be in good financial shape. This means having an adequate level of savings or investments, as well as no outstanding debts or other liabilities that would cause you undue financial stress.
If the option of a reverse mortgage through a bank doesn’t fit, you can always try the private lender alternative. You may have to pay a higher interest rate than you would on a reverse mortgage through an A-lender, due to the extra costs involved when dealing with private lenders, and their higher service fees. But private lenders usually offer interest only terms, so you’ll get the smallest payments possible on your loan.
Certain conditions determine whether or not you can qualify for a reverse mortgage with Canadian private lenders. You must be over 55 years old and have been paying off your house loan for at least five years before applying for a reverse mortgage.
The good part is that there are private lending programs that offer you access to significantly more home equity than the reverse mortgage programs in British Columbia. Plus, they don’t rely on income or credit to qualify. Other than that, private lenders will also consider smaller markets at reduced loan to values.
For example, in some cases, a private 2nd mortgage behind the home owner’s current conventional mortgage can offer a better blended rate than a reverse mortgage. Furthermore, a 2nd mortgage can also provide you with the money to make payments on your first mortgage. As markets increase, you can consider refinancing the 2nd mortgage again and again to achieve your financial goals.
The Takeaway
Reverse mortgages are a great financial instrument to be used by seniors living in Canada and wanting to leverage the value of their homes to finance a loan.
However, due to their specificities, they aren’t meant for everyone.
If you are interested in getting a reverse mortgage but don’t know where to start, simply contact us. We’ll offer you our expertise to help you make the decision that best suits your needs!
You might also enjoy:
- Airbnb Income Tax & Mortgage Options In Canada
- High Rental Portfolio Mortgage: Private Lenders vs. Bank Mortgages
- Empty Home Tax Declaration: Don’t Forget To Declare Your Property Status!
