Have recent economic woes thrown a wrench into your retirement plans? Well, you’re not alone. As more boomers hit retirement age, the question of cash flow and financial stability is becoming more and more problematic. The more financially unprepared these individuals are for retirement, the more likely they’ll need to sell their home in order to avoid the pinch.
Seniors today are living longer, spending more, and saving less. For many boomers, their homes are the only viable source of equity available to leverage. Traditionally, the easiest way for seniors to unlock this asset was to either sell their property or apply for a home equity line of credit (HELOC). But now, thanks to reverse mortgage products, cash-poor seniors can stay in their home and use the property’s equity to access a structured continuous flow of cash, much like a pension.
After Years of Investing in Your Home, Isn’t it Time Your Home Invest In You?
A reverse mortgage is just as it sounds – a backward financing opportunity. Unlike traditional mortgages, which require the holder to make regular payments to the lender, a reverse mortgage pays you from the equity that you’ve added to your home over the years.
Designed specifically for seniors, these mortgage products provide elderly Canadians with consistent cash flow and flexible repayment options. Here’s the skinny:
- Canadian seniors are permitted to borrow up to 50 percent of the appraised value of their home. The amount that you’re eligible to borrow depends on your age; the younger you are when you apply for a reverse mortgage, the less equity you can access. For example, if you sign on at the minimum age of 55, your mortgage would be capped at 20 or 25 percent.
- Once approved for a reverse mortgage, the holder is allowed to spend the money however they see fit.
- While the mortgage holder is charged principle and interest payments, he or she does not have a cash outlay against either payment. As such, seniors aren’t required to repay the principal, or accumulated interest of the mortgage, until they sell their home.
Recent Stats Concerning Reverse Mortgages
According to HomEquity Bank, the nation’s sole provider of reverse mortgages (under the name of the Canadian Home Income Plan), the average reverse mortgage applicant is roughly 72 years of age. These applicants borrow an average of 36 percent of their home’s equity. The average amount of home equity left after a home is sold and the reverse mortgage is paid off? Roughly 50 percent.
“As with any financing product, there are pros and cons to a reverse mortgage,” explains Robb Nelson, Accredited Mortgage Processional and CEO of FamilyLending.ca. “On one hand, a hot real estate market can have a positive impact on a reverse mortgage by boosting the value of the remaining equity in your home. On the other, if the market happens to fall, you could lose a great deal of value.”
With that being said, there are many benefits associated with reverse mortgage products. If the home prices were to fall and your home equity drops, you’ll never owe HomEquity more than the fair market value of your home. If you’re forced to sell your home for less than you owe, HomEquity stomachs the difference, not you.
Furthermore, the income generated from a reverse home mortgage is considered a tax-free source of income. Your reverse mortgage income will not affect any Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) payment you might already be receiving.
How to Apply for a Reverse Mortgage
In order to get the best rate on your reverse mortgage, you’ll need to do a little legwork. The amount Canadian seniors will receive from a reverse mortgage is dependent on the following:
- Your age and the age of your spouse.
- The location of your home.
- The type of home that you own.
- The home’s current appraised value.
“Reverse mortgages give seniors the financial flexibility to retire comfortably, even if they’ve had difficulty saving during the recession,” says Nelson.
For more information on this mortgage product, contact a mortgage broker or speak with a financial advisor. Reverse mortgages rates are available in variable and fixed interest rates. Interest rates are determined by the length of term you choose and can be further reduced if you choose to pay the interest in full each year.