There’s been a lot of talk about reverse mortgages in the media lately. With a new survey showing that 50% of Canadians aged 50+ worry they’ll run out of savings within the first 10 years of retirement, it’s understandable why reverse mortgages are being presented as a viable option to supplement their income. Unfortunately, they come with a longer list of cons than pros – and there are some alternatives to consider. Here’s everything you need to know about reverse mortgages in Canada.
What is a reverse mortgage?
A reverse mortgage is a mortgage product that allows senior homeowners (55+) to borrow up to 50% of the value of their home. A reverse mortgage is secured by the equity in your home and, unlike a home equity line of credit (HELOC), it does not require any income proof verification. If you take out a reverse mortgage, you can use the money to pay for anything you want (home repairs, bills, travel, etc.), and you don’t have to pay back the loan or interest until you sell your home or pass away.
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What are the pros of a reverse mortgage?
There are seemingly many advantages of taking out a reverse mortgage:
- You don’t have to make any regular mortgage payments on it
- You don’t have to prove your income, in order to qualify
- The money you borrow is tax-free, and does not affect your Old-Age Security or Guaranteed Income Supplement
- You can decide how you want to receive the money (lump sum, regular payments or a combination of the two) and you can spend it on whatever you want
- You get to maintain ownership of your property, and
- You don’t have to pay back the loan or interest costs until you sell the home or pass away.
What are the cons of a reverse mortgage?
All of the advantages sound great, right? Well, don’t forget the saying: if it seems too good to be true, it probably is. Some of the disadvantages of taking out a reverse mortgage are:
- There are two lenders who offer them (HomEquity Bank’s “Canadian Home Income Plan (CHIP) and Equitable Bank’s Path home plan”
- Interest rates are much higher than typical mortgage rates (e.g. both providers currently offer a 3-year at 5.84%)
- As you borrow more and more equity, interest starts to accumulate faster and faster
- Additional setup costs (home appraisal fee, application fee, closing costs, etc.) can also add up and are deducted from the amount you’ll receive
- The only way to get out of a reverse mortgage is to sell your home or pass away
- You’ll be subject to a penalty, if you sell the home or pass away within 3 years of taking out the reverse mortgage
- If you pass away, the amount you borrowed + interest must be repaid within a limited period of time, and
- If you pass away, because so much money will need to be repaid to your reverse mortgage lender first, your children or other heirs will be left with less (if anything).
How do you qualify for a reverse mortgage in Canada?
The Canadian government makes it all too easy for senior homeowners to qualify for reverse mortgages. The five things lenders typically look at are:
- Your age
- The equity you have in your home
- The appraised value of your home
- The location of your home (specifically, the city), and
- Current interest rates.
Typically, as long as you’re 55+ and have a home that’s worth something, you’ll be approved for a reverse mortgage. As well, the older you are, the larger amount of equity you’ll be able to borrow, as the lender foresees you having less time to spend it.
What are some alternatives to reverse mortgages?
If any of the cons rang your internal alarms, don’t worry – there are other options for you to consider. If you’re only partway through your retirement years and can already see the balances of your savings accounts dwindle, you may want to consider one of these other options as a way to supplement your income:
- Apply for a HELOC – With a HELOC, you can access up to 65% of the equity in your home and still maintain ownership of your property. Unfortunately, there is an income verification portion of the application, but if you’re making some money off investments then this may not be a problem for you.
- Rent out part of your home – If you just need a little bit of extra money each month, another option would be to rent out a portion of your home – either a room or a full suite. Becoming a landlord may not have been part of your retirement plan, but it’s one more way to maintain ownership of your property.
- Sell your home, downsize and reinvest – If your mortgage is almost, or fully, paid off, a better option may be to sell your home and downsize (either buy something cheaper or rent instead), then invest whatever is leftover. Depending on what you invest your money in, you could come out further ahead by going this route.
If you’re in the middle of your retirement years and know you will need more income in the future, it’s up to you to decide if a reverse mortgage is right for you or not. While we’d be weary of the interest rates, more than anything else, there are some advantages built into this product – depending on how many years you have it, that is. Fortunately, a reverse mortgage is not your only option, if you find yourself in this situation. To get more information, you should sit down with your financial advisor to discuss all your options.