Reverse mortgage offer older homeowners the opportunity to tap into their home equity without having to sell their homes, providing them with financial flexibility. Nevertheless, it is crucial to conduct thorough research and fully comprehend the terms and consequences associated with reverse mortgages before deciding to proceed with one.
What is a Reverse Mortgage?
A reverse mortgage is designed for homeowners aged 55 years and older. It allows you to borrow up to 55% of your home equity tax-free without selling your property. You don’t have to make any regular mortgage payments or pay back the loan until you move out of your home, sell your home, default on your mortgage, or if the last borrower passes away. Instead the interest are rolled into to the existing reverse loan balance.
Lenders will determine your maximum reverse mortgage amount by taking the following 3 factors into account:
Age
Property Location
Property Value
A reverse mortgage is a great option for homeowners who can’t support regular mortgage payments from their retirement income to cover both minor and major expense if cash flow has dried up.
How Does a Reverse Mortgage Work?
Reverse mortgage are very simple. There are 3 main eligibility requirements:
All homeowners must be 55+ years old
Property must be your principal residence (lived in the home for 6+ months)
Home value must be $200,000 - $250,000 minimum
If you pass these three requirements, you will be able to apply for a reverse mortgage through your mortgage broker who will find the best option for you depending on your needs.
You can received reverse mortgage funds from either one initial lump sum, or through smaller advances at regular intervals, such as monthly advances. The funds you receive from reverse mortgages are tax-free and can be used for anything you wish, such as consolidating debt, paying for vacations, etcetera.
Things to Consider
Below are a list of points to consider before applying for a reverse mortgage:
Reverse mortgages come at higher interest rates.
There will be fees involved in a reverse mortgage such as a setup fee, appraisal fee, and legal fees.
The only way out of a reverse mortgage for most people is to sell their home.
You must be able to keep your home in a livable condition.
Do you have any other options such as selling your home or getting a home equity line of credit.
It’s best to speak with your mortgage professional to see if a reverse mortgage is a good fit for you.
Reverse Mortgage FAQ’s
Who provides reverse mortgages?
While there are provincially regulated lenders who can issue reverse mortgages, the two main reverse lenders in Canada are HomeEquity Bank and Equitable Bank.
Will my credit score affect my reverse mortgage approval?
While your credit score is a consideration, the amount of reverse mortgage you are approved for is based on 3 main factors: age, property location, and appraised property value. Your credit score plays a small role in your reverse mortgage approval.
How do I get reverse mortgage funds?
There are two ways to get your reverse mortgage funds:
Can you owe more than your home is worth?
Both Equitable Bank and HomeEquity Bank have “no negative equity” policies stating that borrowers will never owe more than their homes are worth, so long as they comply to their mortgage contracts.
Is there a penalty for paying off my reverse mortgage?
The big two reverse mortgage lenders will allow you to prepay a certain percentage of your initial reverse mortgage balance without penalty. Paying anything more will result in a prepayment penalty determined by the lender.
Generally after 5-years, you can prepay your reverse mortgage balance in full with no penalty if you provide 3-months written notice.
Can you default on a reverse mortgage?
It is 100% possible to default on your reverse mortgage.
Reverse mortgage default can refer to multiple scenarios including:
What is the cost of a mortgage pre-approval?
Nothing!
Only when you decide to move forward with a formal approval is when costs, such as appraisals, can occur.
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