Reverse Mortgages convert equity in your home into tax free income

Reverse mortgages  are available to all Canadian Seniors, 55 and older, who own and live in their principle residences. They provide cash flow from the equity in their homes. They are offered by Homequity Bank, a Schedule 1 bank regulated by the federal government and the only provider in Canada. For more information, go to http://www.homequitybank.ca/

Advantages of reverse mortgages 

  • No regular payments.
  • Money borrowed is tax-free.
  • Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) unaffected.
  • Ownership of home is maintained.
  • Lump sum, yearly or monthly amounts can be received.
  • For a couple with right of survivorship, the loan continues until the final spouse dies.
  • You can never owe more than the value of your home.
  • As long as you are still living there, you can never be forced to move or sell.

Disadvantages

  • Subject to higher interest rates than most mortgages.
  • Equity in home decreases as the interest on reverse mortgage accumulates.
  • At death your estate will have to repay the loan and interest in full within a set time.
  • Settling an estate often can take longer than this set time – possible problem for executor.
  • Less money in estate for children and other heirs.
  • Costs are usually quite high.

Other important considerations

You have the option of paying some or all of the interest once per year. However, if you are going to pay the interest as you go, then you may as well get a conventional mortgage since the borrowing rate will be lower.

If you sell your house, or your home is no longer your principal residence, you must repay the loan and any interest that has accumulated.

The amount of money that you can borrow depends on your age and the value of your home. The older you are, the larger the percentage of equity you can withdraw, up to a maximum of 55% of the value of your home. If you have an existing mortgage on your home, then you will be able to borrow 55% of the value less the mortgage. The minimum loan is $20,000.

Appraisal fees for reverse mortgages typically range from $175 to $400, legal advice from $300 to $600 and closing costs are $1,500 on average.  This includes title search, title insurance and registration. All fees are generally deducted from the amount of funds you receive, so it is not necessary to incur out of pocket expenses.

If your home depreciates in value and the loan amount exceeds it, you will only be required to repay the value of your home, not above and beyond.

If you sell your property or move out within the first three years of having the loan, there is an applicable penalty. The penalty does not apply after three years have passed.

Is it the right choice for you?

reverse mortgage

It’s best to get a reverse mortgage only when you absolutely need it. The older you are the better. Let’s say you or your spouse has to move out of your home to an assisted living facility and the house must be sold.

Assuming the loan has accrued over a long period of time, you may not have enough equity left in your home to cover the facility’s costs. So instead of a larger amount, borrow what you need yearly. This way, you will match your ongoing needs without having extra cash lying around and the interest will accrue more slowly in the event that you have to sell.

In addition to a conventional mortgage, an alternate route may be a line of credit and only repay the interest. This can be risky when the interest rates rise as the increased interest payment will reduce your income.

As always, it is advisable to contact your financial planner to help you decide whether taking a reverse mortgage is both the right choice and timing.