Could a Reverse Mortgage Work for You?
Paul von Martels. February 1, 2019
Whether you’ve learned about reverse mortgages or are largely unfamiliar, it’s important to first shed any biases you may have in regards to carrying debt in retirement. Let’s focus on the facts and consider whether it could be a fit for your financial needs.
The word ‘debt’ itself can have a negative connotation, and it’s no surprise, given the effects of the financial crisis that took hold of the U.S. economy only a decade ago. While that particular crisis heavily impacted the mortgage market and banking institutions—which in turn affected everyday Americans—it’s important to note that the Canadian mortgage market operates differently than the U.S., complete with its own set of rules.
So let’s talk about the reverse mortgage product, how it works and what some of the basic requirements are.
In the simplest terms, a reverse mortgage is a debt product that gives access to tax-free cash with no required ongoing payments.
In Canada, a reverse mortgage is a type of loan that is secured against a homeowner’s principal residence. While it bears some similarities to a regular amortizing balance mortgage, there are a few key differences, namely:
- No required monthly payments
- 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
- Interest accrues on outstanding principal and interest
Let’s focus on the first and final points made above. Payments are not mandatory. This means that any outstanding balance is subject to interest. The interest is calculated off the outstanding balance of principal and interest. If no interest 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 provides borrowers with a source of cash flow.
If a reverse mortgage seems like a viable solution but you’re someone who would prefer to make payments, Equitable Bank offers 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. The combination of these repayment and draw-down options can help reduce the interest costs of a reverse mortgage.
Of the homeowners who apply for the reverse mortgage solution, there are two common scenarios:
- 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.
- The more 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, with a reverse mortgage that does not. 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 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 Eligibility 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 getting tax-free cash when you need it, with no required payments but having interest accrue over time. Depending on your financial needs, the trade-off of accumulating interest can be an acceptable one; you can enjoy your lifestyle, cover expenses, avoid more costly options like selling off investments, and all the while retain 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 Eligibility Calculator to see how much you may be eligible for, speak to your family or trusted friends, and contact a broker to discuss your options in detail.
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.