Reverse Mortgage in Canada
A ‘reverse mortgage’ is a new way of borrowing money for people over 62 years of age. Some people love them, while others say they’re a dangerous last resort.
What is a Reverse Mortgage?
A Canadian reverse mortgage allows people who are house-rich and cash-poor – many of whom could be seniors on pensions, who have their home paid off and are over 62 – to receive a lump sum from a lender. For most of these seniors, their home is their largest asset, yet they can’t borrow against it because they cannot afford a monthly payment against the balance.
Reverse Mortgage: a loan available to seniors that is used to release home equity as either one lump sum, or a series of payments.
In order to apply for a reverse mortgage you must:
- Be 60+ years old
- Own a home in Canada
A reverse mortgage works differently. Once you have the cash in your hand, you’re free to do what you please. Your principal remains and the interest is set at a rate of about 10%. As long as you’re alive and haven’t sold your house, you don’t make any payments on the money you borrow.
But once you sell the house or die, the principal and accumulated interest must be paid back from the profits on the sale of the house.
Benefits of a Reverse Mortgage
Seniors have every right to enjoy their twilight years in their family home. Often, they’re still living in the house in which they raised their family, in a town or city neighbourhood they helped build through community-mindedness and volunteerism. Yet, if they can’t afford to pay their bills, despite being mortgage-free, then a reverse mortgage might be perfect for them.
Perhaps their pension covers their expenses, but doesn’t leave room for the extras. The cash in hand from a reverse mortgage can give them the financial flexibility they require to fulfill their retirement dreams.
The Drawbacks of a Reverse Mortgage
But reverse mortgages have their disadvantages, and for good reason. When a large principal is untouched and accumulating interest in the 10% range for many years, it only takes seven or eight years for it to double, according to The Canadian Home Income Plan.
So if you went ahead and took out this type home loan for $50,000, in seven years you would owe $100,000. In less than 15 years your debt would be $200,000 on that original $50,000 loan. With life expectancy climbing higher and higher each year – Statistics Canada reports a new born baby is now expected to live to 80.4 years, up from 80.2 in 2004 and 77.8 in 1991 – it’s not unthinkable for someone in their early-60s to expect to live more than 20 or 25 years in their home.
So, by the time they are either forced to sell because they are incapable of living at home anymore, or they die well into their 80′s, it’s not inconceivable that they could owe their lender the full price of their home – or more – once it is sold.
Is it worth it? It depends on your situation.
Reverse mortgages are definitely a great way for some seniors to regain financial freedom, while lending against their largest asset – their home – without the struggle of meeting monthly payments. If you live in an expensive neighbourhood in one of Canada’s fine cities, a reverse mortgage might be the perfect retirement treat for yourself, while still guaranteeing your beneficiaries profit on your high-priced home.
But if you’re contemplating a reverse mortgage, be sure to consider all scenarios, including any inheritance you would like to leave once you are gone, because if you take out a reverse mortgage and live many more happy years, your house may no longer be an asset but a form of debt repayment.