Introduction
The increasing maturity found in the demographic retiring in Canada creates a rising interest to persevere financial support during one’s retirement.
One method through which this is being supported is through reverse mortgages. Today, reverse mortgages have become one of the most sought after financial options among many retirees; it enables homeowners to cash part of the home’s equity into tax free without selling the property or having to worry about paying for the monthly mortgage.
In light of the high cost of living, long life expectancy, and the growing need to plan financially for retirement, the trend of reverse mortgages becomes an interest warranting review.
Being a source of guaranteed income supplement and generation for retirement investors who seek an additional supplemental income other than their pension or investments, reverse mortgages allow the use of home equity to keep one’s financial independence intact.
This article explains what the reverse mortgage lenders and mortgages are, what can be considered benefits, where the potential drawbacks are positioned, and why they become an attractive option for retirees in Canada.
What is a Reverse Mortgage? 
A a reverse mortgage product is a financial product that enables homeowners, especially those over 55 years of age, to borrow against the equity in their homes.
In a reverse mortgage, the lender pays the borrower, unlike the conventional mortgages, where the borrower pays the lender.
The only instances when this loan is repaid are either when the homeowner sells the house, permanently vacates it, or dies.
Reverse mortgage, in a way, allows the retiree to tap into the already accumulated value of his home without having to sell the same property. It can be received as a lump sum or in the form of monthly installment or as a line of credit.
The loan amount determined is based on the age of the homeowner, the value of his home, and the interest rates prevailing in the present market.
Differences Between Reverse and Traditional Mortgages
• Conventional Mortgage: The consumer pays each month a certain amount which reduces his loan balance.
• Reverse Mortgage: Payment will be given to the debtor by the lender and the loan balance will increase due to the accrual of the interest payments.
The greatest advantage of a reverse mortgage is that the homeowner makes no monthly mortgage payments, which attracts the attention of retirees who are in need of money but are unable to start a regular source of income to pay off their mortgages regularly.
Reverse Mortgage Key Features
Who Can Qualify?
To qualify to receive a reverse mortgage in Canada, applicants must qualify based on the following criteria:
The age of the homeowner applying for a reverse mortgage must be 55 years old.
Home Equity: an owner of a property. The property owned must be their main residence.
Ample equity in fair market value of the home is must as this will determine how much can be borrowed.
Location: a home for which the reverse mortgages are available; a location within Canada is designated for such, and lenders target neighborhoods where house values are stable or appreciating.
Loan Amount and Distribution
The amount one is allowed to be given by the lender in terms of the home loan depends on several factors such as their age and the value of their home as determined and the appraised value of your home, as well as the current interest rates. Generally speaking, the more mature the homeowner is, the more one qualifies to borrow in terms of percentage the value of their home.
A homeowner chooses to get their loan amount disbursed in whichever way they can;
Lump Sum: This will involve the full and absolute transfer of the loan amount.
Monthly Payments: The loan sum is dispersed in monthly payments to generate recurring income.
Line of Credit: A line of credit available for advance as needed, up to a specific limit.
Repayment Terms
One of the most important characteristics of a reverse mortgage loan secured above is that repayment is not established to be done periodically. The loan becomes due and payable upon sale, permanent moving away, or death.
The loan – plus interest, of course – then must be repaid in some fashion, either by selling the home or otherwise. If the homeowner dies, the estate usually makes the repayment.
Retirement Benefits of Reverse Mortgages work
Home Equity Accessibility
Reverse mortgages allow retirees to tap equity they have built up in their homes over the years. This is very helpful for retirees who are, literally, “house-rich but cash-poor,” that is, with valuable property but only meager liquid assets.
Retirees can now use funds built up through house equity to pay bills and medical expenses or renovate homes without selling a single piece of their properties.
No Monthly Payments
Such an advantage of reverse mortgages is the absence of mandatory monthly payments. The borrower instead receives payment from the reverse mortgage lender; meanwhile, interest accrues on the loan. This feature can help ease financial pressure on retirees living on fixed incomes as they are exempted from making regular payments.
Improved Cash Flow
Reverse mortgages can also significantly improve a retiree’s cash flow. This may involve daily living allowances, debt pay-off, or simply enough funds to help in relieving one of emergency situations. Of course, such an increase in cash flow makes retirement so much more comforting and less worrisome for retirees.
Potential Drawbacks and Considerations
Interest Rates and Fees
There are additional disadvantages home equity loans that depend on the interest rate. For example, reverse mortgages carry higher interest rates than traditional mortgages.
Other potential fees might include closing costs, appraisal fees, and costs for administrative proceedings, among others. All these costs can erode a chunk of the total value of the loan and eventually consume a significant fraction of the amount that one would receive from the sale of their home.
Impact on Inheritance
There is one very important aspect for a retiring person to consider the impact on one’s estate and inheritance of doing a reverse mortgage.
Because this type of loan gets paid off at the time of sale or by the homeowner’s death, the remaining equity in the home could be drastically depleted to virtually nothing to inherit.
When a home has to be sold to pay back the loan, any inheritance that might have accrued could evaporate or be significantly depleted in the process of repayment.
Home Upkeep and Responsibilities
Whereas homeowners who get a reverse mortgage do not have to make monthly payments, they are responsible for maintaining the primary residence only, paying property taxes, and holding homeowner’s insurance.
If they fail in any one of these responsibilities, the loan might be due and payable, and the homeowner would have to pay back the entire balance of the loan.
Increasing Trend and Increasing Demand in the Market
Statistics and Trends
The demand for reverse mortgages in Canada has been growing steadily. Industry statistics reveal that the number of reverse mortgages issued yearly in Canada has been increasing by more than 25%.
Currently, the reverse mortgage industry is approximated to be a multi-billion-dollar industry with thousands of retirees choosing this option as part of their own retirement income strategy.
This is attributed to several drivers, including the high rate of retirees, increased cost of living, and increased life expectancy.
When the older people find financing options toward their retirement with considerable equity in their homes, this type of mortgage is presented to the mortgage brokers and lenders as the most attractive.
Factors Driving the Trend
1. Longer Life Expectancy:
Seniors in Canada live to older ages. Therefore, retirement is longer, and the duration for which financial security is needed is greater. Reverse mortgages can provide age security and a regular income over a longer duration of retirement.
2. Housing Market Growth:
Increasing house prices in Canada have made many seniors hold wealth in the form of house equity. Reverse mortgages allow them to access that house equity without selling the house.
3. Financial Needs at Retirement:
High retirement costs have driven many retirees to look for other ways of planning their finances. For retirees, reverse mortgages enable them to have financial flexibility and a sense of ownership over their financial planning and do not necessarily rely on traditional investments or pensions.
Do You Know If a Reverse Mortgage Is Right for You?
Determining Financial Need
Assess your financial situation and your retirement savings plan before taking this step. You have to consider your current income, savings, and expenditures.
This type of mortgage is advisable if you have the necessity to acquire some extra funds and do not want to move outside your comfortable abode. However, you should weigh against the negative effects it may impose on you, such as higher mortgage interest rates, and its impact on the estate.
Consult Professionals
Financial advisors or even reverse mortgage specialists need to be consulted before a reverse mortgage is obtained.
People you consult on this matter will help explain to you the complexity involved, present other alternatives, and ensure that this particular reverse mortgage funds or does not contradict the long-term goals of your finances.
This should also be used in checking if a reverse mortgage is the best option for your particular case.
Alternatives to Reverse Mortgages canada
Before opting for a reverse mortgage, there are alternative options that might better help your financial needs:
• Home Equity Line of Credit (HELOC): One can access equity in one’s own home equity loan through HELOC; it is just like the reverse mortgage but instead of the money borrowed being free of charge and staying open and rolling over continually, one pays back to the lender each month.
• Downsizing: You sell your house, and then you shift to a smaller house to thereby unlock the funds available and reduce ongoing expenses.
Other options might be refinancing your existing mortgage amount, tapping into the equity or bringing the monthly payments, which will also depend on your current financial situation.
Reverse Mortgages vs. Alternatives
Reverse mortgage is nice because it is not acquired with monthly payments, but can be more costly as the interest rate is higher. For HELOCs and refinancing, it may be lower in cost, but periodic payment is expected.
To access the home equity without borrowing money, downsizing can be done by selling the house – not always a choice for retirees as selling the house could mean moving to a new town or state.
Frequently asked questions (FAQs)
1. How much can I borrow with a reverse mortgage?
The amount of how much you may lend depends on your age, the value of the home, and current interest rates. Generally, the older you are, the more you can borrow.
2. Do I own my home with a reverse mortgage?
Yes, and you still own your home, but the lender would have a lien on the property, and you will have to repay the loan when you sell the house or at your passing time.
3. Will I owe more than my home is worth?
No, most reverse mortgages in Canada have a “no negative equity guarantee,” so you can never a reverse mortgage contract and owe more than what your home is worth at the time of sale.
4. Do I risk losing my home with a reverse mortgage?
Unless you fail to meet the loan requirements, such as keeping the house up and paying property taxes and insurance, you can’t
lose your home because of the reverse mortgage.
5. What happens to the reverse mortgage when I die?
It should be paid back, mostly through sale. Whatever is left as equity sell your home after paying off the loan goes to your heirs.
Conclusion
Reverse mortgage products are becoming more and more attractive to Canadian retirees because they tap into home equity without the need for monthly payments and for life.
Benefits of a reverse mortgage work with mortgages – this includes access tax free cash out flow and no repayment until such time as the home is sold.
Among the potential downsides, however, are even higher interest rates and how this will affect inheritance.
For those interested in getting a reverse mortgage, there are several things to do before deciding what is best for them; this would include a financial needs and goal analysis, consulting with your professionals, and maybe some other alternatives as well.
Proper planning is key to having the effective tool of enhancing financial freedom and security in retirement when using a reverse mortgage.
If you are interested in a reverse mortgage, the professionals at Sheltos can walk you through this process to see if this is the right solution for you.
