Reverse Mortgages

If you're a Canadian senior, a reverse mortgage can help you access the equity in your home without having to move or sell nor make payments of any kind.

A reverse mortgage is loan that enables home owners to convert part of the equity in their home into cash.

The General Issue

Besides falling, the number one fear of many seniors is not having enough money to pay their day-to-day living expenses as they grow older. Have you thought about it yet - maybe not for yourself, but what about for your parents?

Fact: the majority of the 9-million-strong "baby boomers" have the bulk of their net worth in their house. Their investment stocks, RRSPs and TFSAs making up the last 1/10th of their balance sheet. Only 30% of boomers have some sort of pension plan, and CPP/OAS (if you are eligible) is going to pay only about $1200/mo.

A reverse mortgage is a product that allows a home owner 55+ to access 10-50% of the equity in their home as either lump sum or over time with no requirement to make monthly payments nor to qualify based on income, credit, or health.

While one can argue with the prudence of tapping into home equity, to the retired or retiring homeowner who is low on options and cash flow, the access to money this option provides is compelling.  Here's a link to a Globe and Mail article with some real examples.

For those that want to remain in their current homes and maintain their existing standard of living, obtaining a reverse mortgage might now be the only realistic option. Statistically, 60% of the borrowers in these programs will be elderly women who live alone with a median age of 76 years.

Reverse Mortgage - Things to Keep In Mind

We'll get to the good below. Let's take a look at the "fine print" for a moment.

  • It costs about $2500 to set-up a reverse mortgage (home appraisal $225-350, independent legal advice $200-400, closing and legal costs ~$1700)
  • If house price appreciation is limited in your market area, interest on the loan may potentially erode the equity.
  • Loss of equity combined with a requirement to move, could limit future housing options for the borrower.
  • Many financial advisors consider this source of funding to be used only as a last resort - at very least, access to independent advice is critical.
  • Limits/reduces the inheritance you will have available for your offspring.

That being said, a Reverse Mortgage can reduce financial stress significantly when you are low on options today.

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As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.

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Advantages of a Reverse Mortgage

  • Mainly, a reverse mortgage enables homeowners to continue living in their homes at modest cost while converting some of their home equity into cash or extra income.
  • Provides money that might be needed to simply keep their home repaired, pay property taxes, retire debt, meet day-to-day expenses, provide for in-home care, or fund some emergency or other extended care requirement. At a more complex level, funds could be used for life insurance and estate planning objectives.
  • With lifetime reverse mortgages, the loan need not be repaid by the homeowners unless they wish to sell and move.
  • In any case, the homeowners (or their estate) can never owe more than the fair market value of the home.
  • In Canada, the money received is not taxable. If the cash is invested, the interest expense is tax deductible.
  • Interest rates have been reduced substantially since the products were first introduced, now lying about 1¼ % to 2¼ % above regular wholesale mortgage rates, depending on provider.
  • Does not add to homeowner's income (like a RIFF withdrawal), so no OAS/GIS claw-back risks.
  • It can reduce the stress of adult offspring, who might otherwise have the financial burden of providing care for their aging parents.

The market for reverse mortgages is growing, the Canadian Government (OSFI) is watching, and safeguards exist. There are multiple providers now and rate competition. From a mortgage and financial planner's point of view, a reverse mortgage may be a solution to help a client or their parents meet their financial objectives as tapping into home equity creates options and flexibility.

If you think a reverse mortgage is right for you, let's get started with a complimentary assessment.

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