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What is a reverse mortgage, really?

This post is sponsored by Equitable Bank. It was first published on May 27, 2019, and was updated on April 11, 2023.

I get it, I too live by the principal of if it seems too good to be true, it probably is. In some ways, reverse mortgages might seem to fall into this category. Whether you’ve educated yourself on reverse mortgages or are largely unfamiliar, it’s important to first shed emotional biases you may have about debt in retirement. Let’s focus on the facts and consider if they might fit your needs, to determine whether or not reverse mortgages are, in fact, too good to be true.

The word ‘debt’ itself often carries a negative connotation. Sure, having sufficient savings would be ideal, but isn’t always a reality. Many of us recall hearing terrible stories about mortgage defaults in the U.S. during the financial crisis, and vowed to never expose ourselves to such an event. While that particular crisis heavily impacted the senior homeowners, the larger mortgage market and banking institutions, it’s important to note that the Canadian mortgage market operates differently than in the U.S., complete with its own set of rules for reverse mortgages – so, a similar crisis is conceivably less likely to occur here.

Let’s discuss the reverse mortgage product — how it works and what some of the basic requirements are to get one.

In simplest terms, a reverse mortgage is a mortgage debt product that gives homeowners access to tax-free cash with no required ongoing payments.

In Canada, a reverse mortgage is form of mortgage loan that’s secured against a homeowner’s principal residence (must live in the house for 6+ months per year). While it bears some similarities to a regular amortizing balance mortgage, there are a few important differences, namely:

  • No required monthly payments
  • Interest accrues on outstanding principal and interest
  • Loan amount is calculated using borrower’s age, house location and house value
  • No maturity date
  • Applicants must be 55 years of age or older
  • Applicants must own their house/residence
  • Additional fees, including a one-time setup fee

Let’s focus on the first few points above. Payments are not mandatory and the outstanding mortgage balance is subject to interest.  The interest is calculated off the outstanding balance of principal and interest. If no interest or principal payments are made, the outstanding balance will increase accordingly over time. The trade-off of accumulating interest is the simple fact that reverse mortgages don’t require payments, which alleviates a cash flow burden that regular mortgages require.

As for paying back a reverse mortgage, they typically are required to be paid off all at once at loan maturity. Maturity occurs when you sell or leave your home permanently.

However, if a reverse mortgage seems like a viable solution but you’re someone who would prefer to make payments, reverse mortgage lenders like Equitable Bank offer flexible repayment options. These prepayment privileges make it possible to pay down a portion of the principal and all interest, without incurring any prepayment charges (subject to certain conditions). As well, Equitable Bank offers a number of options in terms of how customers can receive the funds from their loan; lump sum upfront, scheduled / recurring draws, and ad-hoc draws based on need. Used together, these repayment and draw-down options can help reduce the interest costs of a reverse mortgage.

To help make this product easier to understand, we’ve summarized a few common scenarios:

  1. A reverse mortgage applicant owns the residence outright, with no existing mortgage or line of credit. The applicant’s main objective is to get access to cash to cover expenses, whether those expenses are living costs, renovations, early inheritance, a new car, or anything else. Borrowers may qualify for more money than they need, and can choose to take some of the cash up front, and then withdraw more funds at a later date—similar to a line of credit. This option helps reduce the amount of interest.
  2. Another common scenario is where reverse mortgages are used to pay-out an existing mortgage on the principal property. Essentially a borrower would replace the existing mortgage that requires payments or has a higher interest rate like a private mortgage. If the borrower has a current mortgage that is greater in value compared to that which they qualify for under a reverse mortgage, they could use personal investments or savings to make up the difference. To better understand these details, it’s a good idea to speak to a mortgage broker or agent to discuss your options.

The reverse mortgage amount you’ll qualify for will be a function of your age, property value, and property location—you can try Equitable Bank’s reverse mortgage calculator to see the amount you could qualify for.

When it comes to making a decision, a reverse mortgage has a lot to do with accessing tax-free cash when you need it, with no required payments and having interest accrue over time if payments aren’t made. Depending on your financial needs, the trade-off of accumulating interest can be an acceptable one; you can enjoy your lifestyle, cover expenses and avoid costly options like selling off investments or selling your home in a bad housing market all the while retaining ownership in the home where you’ve gathered so many memories. You can also manage the accumulating interest with flexible repayment options, and your home could even increase in value over time, which could offset a portion of the interest. If a reverse mortgage sounds like a solution that might be for you, use Equitable Bank’s Reverse Mortgage calculator to see how much you may be eligible for, speak to your family or trusted friends, and contact a mortgage broker to discuss your options.

Having access to sufficient and stable cash flow in your retirement is critical.  Finding the financial solution that achieves this, at the lowest cost to your hard earned equity is the goal. Hopefully you’ve learned more about reverse mortgages and how they can fit into a retirement solution.

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Photo by frank mckenna on Unsplash