The Pros and Cons of Reverse Mortgages

The Pros and Cons of Reverse Mortgages

What is a reverse mortgage?

Reverse mortgages provide an alternative and secured income source for homeowners. Here are some pros and cons of reverse mortgages

 

Reverse mortgages are loans that allow homeowners to take out equity from their property without repaying withdrawn amounts. Financing is disbursed in monthly installments or a series of lump sums. Any equity you have decreases as you use a reverse mortgage loan.

 

Additionally, when using reverse mortgage funds, you’ll only owe accumulated interest on the loan. These payments can be made on a monthly basis or when you decide to sell your home.

 

Who can access reverse mortgages?

Homeowners who are retired and over 55 years of age typically make up the brunt of this market.  

 

Long-time homeowners are best able to access reverse mortgages because their homes normally gain several thousands of dollars’-worth of equity within many decades. Thus, the most a homeowner can borrow is up to 55% of their home equity.

 

Retiree homeowners are also likely to have paid-off their mortgage before signing up for a reverse mortgage.    

  

Why should or shouldn’t I get a reverse mortgage?

Deciding on whether or not to apply for a reverse mortgage comes with considerable positive and negative circumstances.

 

Outlined below are common conditions that come with getting a reverse mortgage loan.

 

Reverse Mortgage Pros and Cons

If you plan to hand down a significant amount of funding that has accumulated on your estate’s value as an inheritance, having a  reverse mortgage will likely decrease your intended contributions in your will.

 

This is because the principal amount and interest on a reverse mortgage loan has to be repaid upon your death.

Interest rates on reverse mortgages are higher than traditional mortgage loans.Should you sell your home, buy or move to a secondary residence, you will have to repay the entire loan (principal and interest).Moving or selling your home within the first three years of getting a reverse mortgage can result in a repayment penalty.

 

Reverse Mortgage Pros and Cons

Advantages

Disadvantages

You can use the loan to supplement retirement savings or pension income. Getting a reverse mortgage means losing equity on your home as the interest on your reverse mortgage increases.
Any money you borrowed on behalf of the loan is tax-free. Interest rates on reverse mortgages are higher than traditional mortgage loans.
Getting federal and provincial pensions and programs you’re eligible for, such as Old Age Security or Guaranteed Income Supplement benefits, won’t be affected. If you plan to hand down a significant amount of funding that has accumulated on your estate’s value as an inheritance, having a  reverse mortgage will likely decrease your intended contributions in your will.
This is because the principal amount and interest on a reverse mortgage loan has to be repaid upon your death.
You don’t lose ownership of your home while holding a reverse mortgage. Should you sell your home, buy or move to a secondary residence, you will have to repay the entire loan (principal and interest).
You may access some of your home’s equity as cash to use while keeping ownership of your home. Moving or selling your home within the first three years of getting a reverse mortgage can result in a repayment penalty.
Overall pro: Your lending institution cannot repossess your home, even if you miss payments on your loan or don’t make a single payment. 

You’ll still be responsible for paying property taxes.

Overall con: If you plan to use your home equity as a trust fund or inheritance scheme for children or other heirs, getting a reverse mortgage may cause more damage than relief.
Seeking out an equity-secured line of credit with your financial institution may serve as a better option. However, getting a line of credit will require you to make payments on time, can be limited, or result in higher-than-normal interest rates.

Homequity Bank is currently the only institution that provides reverse mortgages through its CHIP reverse mortgage plan.  

 

Which companies or institutions provide reverse mortgages within Canada?

 

Banks, credit unions, trust companies and other financial institutions don’t provide reverse mortgages.

 

What are some key points I should consider before applying for a reverse mortgage?

  • While taking on a reverse mortgage relies on how much equity your home has acquired, keep in mind that you’re still applying for a mortgage
  • You may have to pay closing and legal fees and go through a home appraisal process

 

What are other alternatives to getting a line of credit or a reverse mortgage?

If neither a line of credit or reverse mortgage suits your current circumstances, you can:

 

  • Sell your current home or downsize into a new home
  • Apply for a property tax deferral (in certain locations)
  • Renting out (a portion of) your home
  • Cashing in investments in your portfolio, such as stocks and bonds


Carefully weighing your options can help you make choices that work to your financial needs. 

 

 

With Loanerr, borrowers can shop many loan options and apply for a
mortgage fast – anytime, anywhere, from any device.

 

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A Maryland native and Toronto-area transplant/graduate of the University of Toronto, Christine is a content writer at Loanerr. When not writing articles, she's an avid swimmer, cat lover, violinist in a indie band, and a humble food aficionada.