A reserve mortgage gives you access to tax-free cash through your home’s equity and can be a great way to pay off debt, fund your travel dreams, pay for a child’s education, invest in home improvements and more. As long as you meet the eligibility criteria, a reverse mortgage could be a great way for you to access extra cash and find stability later in life.
What Is A Reverse Mortgage?
As you get older, you may start to worry about how you’ll keep your home and manage payments without a steady income. A reverse mortgage offers you the peace of mind you crave and the stability to make it possible, by giving you access to your home’s equity in tax-free cash, and allowing you to stay in the home you love without worrying about making any monthly payments.
By definition, a reverse mortgage is a loan that you secure against the value of your home that gives you access to tax-free cash without mandatory ongoing payments. It’s designed for homeowners who are 55+ and it enables you to convert up to 55% of your home’s equity into tax-free cash you can use to pay for travel, education, home improvements, debt or whatever you like.
Benefits And Considerations Of A Reverse Mortgage
Before you decide to pursue a reverse mortgage, it’s important that you have a solid understanding of what benefits they offer and what drawbacks you could encounter:
- The money you receive through a reverse mortgage is tax-free and requires no monthly mortgage payments.
- How you receive the money is up to you. You can choose to access it in one large lump sum or spread it out over a longer period of time with scheduled deposits.
- Reverse mortgages don’t impact your ability to qualify for Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
- Interest rates may be higher than those you would have with another type of mortgage. As you accumulate interest on your loan, your home equity amount may also go down.
- Your estate will need to pay off the loan and interest within a set period of time when you pass away. In some cases, the time required to settle an estate can be longer than the time allowed to pay back the reverse mortgage. Since money from your estate will be required to pay back the loan, you will also have less money to pass on to family and beneficiaries through your estate when you pass away.
- Keep in mind you will also have to repay the amount still owed if you sell your home, move out or default on your loan.
Reverse Mortgage Eligibility
In order to qualify for a reverse mortgage, you’ll need to meet specific criteria. You may be eligible for a reverse mortgage if:
- You’re 55+ years of age (if you have a spouse, they must be at least 55 as well)
- You live in a major urban centre of Ontario, Quebec, British Columbia or Alberta
- Your home is your principal residence (you live there for at least 6 months of the year)
- Your residence is owner occupied and not a secondary home or cottage
- All title holders apply as joint borrowers (ON, AB, BC)
- Your home is classified as detached, semi-detached condo or townhome
In order to get approved for a reverse mortgage, you’ll first need to ensure you pay off and close any past debts including your mortgage and home equity line of credit (HELOC).
Once approved, you’ll continue to own and live in your home, with no threat of being forced to move or sell as long as you live there for at least 6 months of the calendar year, keep your residence in good order, adhere to the loan terms and keep up with your property tax payments. The maximum amount you’ll be entitled to with a reverse mortgage will depend on your age, your lender and your home’s appraised value.
Types Of Reverse Mortgages
In Canada, there are two financial institutions that offer reverse mortgages (HomeEquity Bank and Equitable Bank). Be sure to ask your lender what payment options they offer for reverse mortgages and whether there are any restrictions or fees you’ll want to be aware of at the start.
When Do You Repay A Reverse Mortgage?
With a reverse mortgage, you don’t have to make regular payments, but you do have the option to repay the principal and interest in full at any time, just keep in mind you may encounter a fee to pay it off early. You’ll be required to pay off the amount owing if you sell your home, move out of your home, the last borrower dies or you default on the loan.
Defaulting on the loan involves using money for anything illegal, being dishonest in your application, letting your home fall into a state of disrepair to decrease the value or not following conditions set out in your reverse mortgage contract.
Make sure to ask your lender about their specific time frames for repayment and what your options are should you need to move into a long term care home as you age. Keep in mind that interest is calculated on the outstanding balance of both principal and interest throughout the lifespan of the loan, so the outstanding balance will increase accordingly over time.
As with any financial decision, make time to speak with your lender about reverse mortgages to learn more about how suited they are for your personal situation.