Canada enables its citizens to live the best lives they can in many different ways. One of them is by offering extra support to seniors in the shape of a specially designed loan called “reverse mortgage”.
It’s a well-known fact that seniors face challenges unique to their particular age group, and financial resources could become of the essence. If needed to treat health issues, support living expenses, or care for another family member, money can be much-needed.
This is precisely where a reverse mortgage steps in.
But what is a reverse mortgage, how does it work, and what should you know about getting a reverse mortgage in Canada? This blog will answer these questions to help you get the most out of this helpful financial tool.
What Is a Reverse Mortgage?
The name may not be very suggestive, but a reverse mortgage is a type of loan that enables seniors over the age of 55 to get money using their home’s equity without having to sell the property.
In other words, it allows the borrower to access funds that are equivalent to the value of the property.
Who Can Get a Reverse Mortgage?
Although age is an important factor of getting a reverse mortgage, it’s not the only decisive factor.
- While you do need to be over 55 years of age to apply for a reverse mortgage, you also need to own the home you will use as collateral for the loan. In fact, not only do you need to own it, but you also need to have it as your primary residence. In other words, you need to live there for at least six months a year.
- You can not have more than 80% of the home’s current appraised value.
- You must have good credit, and your property must have insurance to protect the lender in case of default.
- You must have enough equity in your home to meet the minimum loan amounts.
- You must have a source of income to pay expenses such as taxes, insurance, and maintenance.
- If there are any other individuals listed on your home’s title, you need to include them in the application form. They must also be at least 55 years old.
- Since this is a delicate matter, your lender may also ask to see proof that you got independent legal advice before proceeding with your application.
How Does a Reverse Mortgage Work In Canada?
Before you proceed with getting your reverse mortgage, you typically need to ensure that you have paid off and closed any lines of credit secured by your home.
You can benefit from the money either as a one-time lump sum payment or by taking an initial amount up front and then continuing to take the rest over time.
The amount you’ll be eligible for when it comes to getting a reverse mortgage in Canada will weigh in factors like:
- Your home’s appraised value
- Your lender
- Your age.
Although there’s nothing you can do to change your age and little you can do to change your home’s appraised value in order to positively influence the amount you can get, you do have the power to choose your lender wisely.
A reverse mortgage allows you to pay back the loan when you sell your home when you move out, or when the last borrower dies. Until then, there are no monthly payments to be made.
What Are the Benefits Of Getting a Reverse Mortgage In Canada?
Since not many people in Canada know how a reverse mortgage works, many don’t know about its benefits either. Let’s shed some light on this and see exactly why a reverse mortgage can be a wise financial move.
A reverse mortgage best benefits those who apply for it as soon as they reach their eligibility age. If you did so and continued to live comfortably in your home for what is considered to be an average life span, you could yield the benefits of a reverse mortgage for at least 15–20 years.
Other than that,
- There are no regular payments to be made – This is, in fact, what makes it a reverse mortgage when compared to a typical mortgage.
- There is no tax to be paid – You borrow this money without having to pay any tax on it.
- You can get cash – Without needing to sell your home. This is because you can access some of the equity of your home in the form of money.
As you can see, there are plenty of benefits to reap when it comes to getting a reverse mortgage. All you need to do is fit the eligibility criteria and find yourself a reputable lender. It’s best to work with a mortgage broker who can help you through the process and find the best lender for your situation. In the long run, a reverse mortgage can help you live out the retirement you’ve always dreamed of.
What Costs Should You Expect With a Reverse Mortgage?
When securing a reverse mortgage for your retirement residence in Canada, you also need to be well-informed about the costs you may incur. Firstly, it’s important to note these costs may either be added up-front or regularly to your balance.
You may need to pay one or some of the following:
- A home appraisal fee
- A setup fee
- Legal fees associated with either your independent legal advice or closing costs
- A prepayment penalty, in case you pay off your mortgage before its due date.
The one thing you need to remember about these costs is that they’re not fixed. Depending on the lender you find, you may get better prices and/or may need to add some savings to your budget.
Are There Other Options To A Reverse Mortgage?
If you live in Canada, alternatives to reverse mortgages can come in the way of 2nd mortgages or home equity loans. These work differently than reverse mortgages, and in some cases can be more cost-effective.
For instance, having a 1st mortgage with a bank usually comes with the lowest interest rate of all mortgage options. Obtaining a 2nd mortgage to assist you with payments and/or extra funds often come at a lower blended rate than an alternative, or reverse mortgage.
The best way to see this is by using a blended rate calculator. This will take your current 1st mortgage and rate and combine it with your new 2nd mortgage and rate to provide you with a blended rate between both products. Often this blended rate is far cheaper than a reverse mortgage rate, helping you save some of the costs.
What if you currently have a reverse mortgage but it’s not enough, and your lender will not provide additional funds?
There are some lenders that for a fixed period say, 2 or 3 years will provide a 2nd mortgage behind a reverse mortgage. You must weigh out the pros and cons of such financing because the 2nd mortgage lender will at some point call the loan and this may trigger you to have to pay out the reverse mortgage.
Other options are pre-paid mortgages or balloon mortgages. With a pre-paid mortgage, the lender holds back payments for a set period, say 1 or 2 years. At the end of that period, you would either have to make regular payments or refinance the loan again.
A balloon mortgage allows the mortgage to grow for some time again usually 1 or 2 years and at renewal, you would either have to start making payments or refinance the loan again.
You can discuss all these financial options with your mortgage broker who can help you choose the one that suits your needs. An informed decision will help you steer clear of problems in the future.
Getting a reverse mortgage may be ideal for you when you’re over 55 years old, and would benefit from some of your home’s equity while still remaining its owner. As in the case of a traditional mortgage, a reverse mortgage will come with one or more associated costs that you’ll need to pay either upfront or further down the line.
Of course, these costs can turn to your advantage when you work with top lenders. Contact us, and we’ll find you the best private lenders with fees to match your budget needs. Before you know it, your home will become worth so much more than you thought it would.
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