What do you do if you are a pensioner and you are in need of money and the only thing of value you own is your house? Well, you might want to think about getting a reverse mortgage.
A reverse mortgage is a mortgage that is given to people who own a home or condominium and are 55 years or older. A reverse mortgage means the borrower doesn’t pay back the loan until he or she sells the home. If the borrower dies before the loan is paid back, then the estate becomes liable for the loan.
If you own a home or condominium and have been making regular payments towards your mortgage for years then you have something called equity build-up.
Equity simply means the value of your home ownership – what the home is worth today minus the mortgage you still carry on the home. Consequently, the more you paid towards your mortgage, the higher the equity of your home and the more likely you are to qualify for a reverse mortgage.
A reverse mortgage lets you borrow money against your home equity and it is secured by your home equity. Just as with a regular mortgage, the reverse mortgage is also registered against your title in whichever amount you borrowed.
The reverse mortgage doesn’t work like a regular mortgage. If you decide to go with a reverse mortgage, instead of being charged monthly mortgage payments, you don’t make any payments.
However, that doesn’t mean you don’t have to pay the loan off eventually or that interest won’t accrue on the loan. The interest on the reverse mortgage does accrue and your home equity decreases with time.
If and when you sell your home you have to pay off the reverse mortgage and any interest that accumulated on it.
However, to even qualify for the product usually a good amount of the mortgage must have been paid off.
If you need access to funds, or you need help with living expenses and you qualify for this program, then this may be an option.
However, you should be aware that there are advantages and disadvantages to getting a reverse mortgage.
- A reverse mortgage is a tax-free source of income;
- There is no obligation to make regular payments on the loan;
- Even though you are deriving income from your home, it doesn’t affect your Old-Age Security or Guaranteed Income Supplement;
- You get to keep your home.
- Reverse mortgages carry higher interest rates than regular mortgages;
- Once you die, then the duty to repay the loans falls to your estate. The estate has to repay the loan and the interest in full and is given a limited time to do so. This is sometimes problematic as it may take more time to settle the estate than the estate is given to repay the loan;
- Following that the estate has the obligation to repay the debt and interest, there will be less money to be left to your family;
- Reverse mortgages usually carry high costs.
As any mortgage, including a reverse mortgage, has to be put on the title to your home or condominium you need to hire a real-estate lawyer. It may also be a good idea to consult with a lawyer beforehand if you are thinking about getting a reverse mortgage.
Understanding Reverse Mortgages
CHIP Reverse Mortgage Plan for Canadian Seniors