Canadian Reverse Mortgages
If you’re a senior who’s short on cash, but you’d like to stay in your home, you might be considering a reverse mortgage. In this article, we’ll look at what a reverse mortgage is, how to qualify for one, the pros and cons of a reverse mortgage, and reverse mortgage alternatives.
What is a Reverse Mortgage?
A reverse mortgage is a loan that lets seniors (generally those 55 years of age or older) borrow equity from their homes on a tax-free basis. Unlike a regular mortgage or Home Equity Line of Credit (HELOC), you don’t need to make regular payments on a reverse mortgage. It’s only when you sell your home or pass away that the reverse mortgage is repaid.
With a reverse mortgage, you have the choice of receiving a lump sum or a regular income stream. And you can use the funds as you see fit. Common uses include paying for living expenses, bills, home repairs, and medical expenses.
Qualifying for a Reverse Mortgage
Unlike a regular mortgage, lenders aren’t really concerned about how much income you earn. They’re more concerned about how much equity is in your home.
Qualifying for a reverse mortgage depends on the lender you’re working with. That being said, here are some common things most lenders look at.
- You, the homeowner, must be 55 years old or older.
- Anyone who’s on the title must sign the reverse mortgage paperwork.
- The home must be your primary residence.
- Have at least 50% to 55% equity in your home. If you still have a mortgage, the reverse mortgage can be used to pay it off along with any other loans secured against your home.
Pros and Cons of a Reverse Mortgage
- You don’t have to make regular payments with a reverse mortgage, so it doesn’t affect your cash flow.
- If you’re like many seniors who are “house rich, cash poor,” a reverse mortgage lets you access the equity in your home without selling it.
- Unlike other income sources for seniors like CPP, OAS, RRSPs, and RRIFs, you won’t have to pay any income tax on any money you withdraw from a reverse mortgage.
- Since reverse mortgage money isn’t taxable income, it doesn’t affect your eligibility for means-tested benefits like GIS and OAS.
- Although reverse mortgage interest rates have come down a lot, you can still expect to pay between 1.50 and 2 percent higher than a HELOC.
- If you were hoping to leave some inheritance to your children, a reverse mortgage might make it so that you have little to nothing left to pass along to your adult kids when you die.
- There are fees associate with setting up a reverse mortgage, some of which you may have to pay out of pocket.
- If you fail to keep your home in good repair, it’s possible that the reverse mortgage lender could call the loan.
Reverse Mortgage Alternatives
If you’re a senior earning a decent amount of income, you might consider applying for a HELOC instead. A HELOC almost always has lower interest rates than a reverse mortgage. The payments can be minimal, too. You might only have to make interest-only payments.
Another alternative might be renting out part of your home. For example, if you have a basement apartment that’s sitting vacant, by renting it out, you can earn some extra income to pay for your daily living expenses. This can help you afford to stay in your home and not be forced to sell it.
The Bottom Line
Are you not sure whether a reverse mortgage is right for you? Let us help you. Get in touch with one of our experts, and we can help walk you through the process.