5 Reverse Mortgage Pros And Cons

Figure out how much money you could potentially access with our free reverse mortgage calculator. Share a few details, and we’ll calculate how much equity could be yours. A member of the HomeWise team will reach out to you with more details, too.

If you’re a property owner who is at least 55 years old, you can borrow against your home’s equity (up to 55% of the current value of your home) to get tax-free cash from a lender. However, unlike a regular mortgage, you aren’t required to make monthly loan payments. Instead, you’ll repay the loan when you or your heirs sell the house. (Keep in mind you’ll still be responsible for property taxes and home insurance.)

In addition to being at least 55 years old, there are a few other requirements to get a reverse mortgage, depending on your lender. For example:

• All people listed on your home’s title must be at least 55 years old.
• The property has to be your principal residence, meaning you live there for at least six months of the year.
• Your home must have a minimum $250,000 property value.
• Your lender may require you (and any non-title holding spouse) to get Independent Legal Advice (ILA) and provide an ILA Certificate as proof that you obtained ILA.
• You must pay off and close any outstanding loans or lines of credit secured by your home, such as a home equity line of credit (HELOC) before getting a reverse mortgage. (However, you can use the money you get from a reverse mortgage to do this.)

Types of Reverse Mortgages

Similar to a conventional mortgage, a reverse mortgage can be available either on a fixed-rate term or a variable-rate term.

A fixed rate reverse mortgage has an interest rate locked in for a determined period, namely six months, one year, three years or five years.

With a variable rate reverse mortgage, the interest rate fluctuates according to the Bank of Canada’s lending rate and may fluctuate up or down during the mortgage term.

You’re probably wondering how it’s possible to get a mortgage with no payments. Normally, when you take out a mortgage loan, the bank gives you a lump sum that you pay back with interest over time. At the end of the term, the loan is paid down to $0.

A reverse mortgage works in, well, reverse. The lender actually makes payments to you: You can choose to receive a lump sum or one smaller payment followed by installments over time.

The interest and fees associated with the loan get rolled into the balance each month. That means the amount you owe grows over time, while your home equity decreases. You get to keep the title to your home the whole time, and the balance isn’t due until you sell the property or die.

When that time comes, proceeds from the home’s sale are used to pay off the debt. If there’s any equity left over, it goes to the estate. If not, or if the loan is actually worth more than the house, the heirs aren’t required to pay the difference. Heirs also can choose to pay off the reverse mortgage or refinance if they want to keep the property.

In addition, you may be required to pay off the reverse mortgage early if you default on your loan. This could happen if:

• You used the money for an illegal purpose or activity.
• You were found to be dishonest in your loan application.
• You allow your house to fall into disrepair, thereby lowering its value.
• You don’t follow the conditions in your reverse mortgage contract, such as living off of the property for greater than six months of the year.
• You fail to pay your property taxes, home insurance or other associated costs with home ownership.

The two main providers of reverse mortgages in Canada are HomeEquity Bank (known for the CHIP Reverse Mortgage) that is available across Canada and Equitable Bank, which offers a reverse mortgage in cities and most large towns across Ontario, Alberta, B.C. and Quebec.

If you’re struggling to meet your financial obligations, a reverse mortgage may help you stay afloat. Here are a few benefits to opting for a reverse mortgage.

1. Helps Secure Your Retirement

Reverse mortgages are ideal for retirees who don’t have a lot of cash savings or investments but do have a lot of wealth built up in their homes. A reverse mortgage allows you to turn an otherwise illiquid asset into cash that you can use to cover expenses in retirement.

2. You Can Stay in Your Home

Instead of having to sell your home in order to liquify your asset, you can keep the property and still get cash out of it. This means you don’t have to worry about potentially downsizing or getting priced out of your neighborhood if you had to move.

3. You’ll Pay Off Your Existing Home Loan

Your home doesn’t have to be paid off in order to take out a reverse mortgage. In fact, you can use the proceeds of a reverse mortgage to pay off an existing home loan. This frees up money to put toward other expenses.

4. You Won’t Have Tax Liability

According to the Canada Revenue Agency, the funds from a reverse mortgage are tax-free, unlike money withdrawn from your RRSP, RRIF or other taxable accounts.

5. You’re Protected If the Balance Exceeds Your Home’s Value

In some cases, the value of your home could end up being less than the total amount owed on the reverse mortgage. This can happen if home prices fall, for example. If this occurs, your heirs don’t have to worry about paying the balance. Both HomeEquity Bank and Equitable Bank have a No Negative Equity Guarantee on their products.

So what is the downside of a reverse mortgage? Though it might seem like there are many benefits, there are also some serious risks to consider.

1. You Could Lose Your Home to Foreclosure

In order to qualify for a reverse mortgage, you have to be able to afford your property taxes, homeowners insurance and other costs associated with owning your home. You’re also required to live inside the home as your principal residence for over six months of the year.

If at any point during the loan period you become delinquent on these expenses, or spend the majority of the year living outside the property, you could default on the reverse mortgage and lose your home to foreclosure.

2. Your Heirs Could Inherit Less

Homeownership is a key path to building generational wealth. However, a reverse mortgage usually requires the home to be sold to repay the debt. When you die, your heirs or estate will be required to pay the full loan balance. Usually, that means either selling the home to repay the loan or foreclosing the property (essentially turning the property over to the lender) to satisfy the debt.

Not to mention, a reverse mortgage eats away at your home’s equity. By the time it needs to be paid off, there may not even be any equity to be left to your heirs.

3. It’s Not Free

You might not have to make payments with a reverse mortgage, but there are still plenty of expenses associated with one. Interest rates are typically higher than a HELOC. Not only do you have to keep up on your taxes and insurance, but there may be either a set up or closing fee. And if you want to pay off the loan early, there may be early repayment charges.

4. The Amount of Money You Can Access is Capped

With a reverse mortgage you can access up to 55% of the appraised value of your home, but the amount you qualify for may be less. For example, the range for Equitable Bank’s Flex reverse mortgage is between 15% and 55% of your home’s value. Various factors affect your final payout including your age, the type of home (condo, townhouse, semi-detached or detached) and the location of your house.

5. Reverse Mortgages Are Complicated

There are a lot of rules and caveats to reverse mortgages. These loans come with many risks that may not be worth the extra cash. You should be wary of any reverse mortgage offer unless you understand the terms really well.

A reverse mortgage may be helpful but isn’t for everyone. There are a few factors that can make a reverse mortgage worth it:

• Your home is increasing in value considerably. If you’re building up a lot of equity in your home, you may be able to take out a reverse mortgage and still have money left over for your estate.
• You plan to stay in your home for a long time. Just like a regular mortgage, there are significant upfront costs associated with the loan. You’ll want to be sure you plan to live in that home long enough to make those costs worth it.
• You can cover the costs of your home. Since staying current on property taxes, insurance, maintenance, etc. is required to keep your reverse mortgage current, it’s important that you have plenty of cash flow for these expenses.

Ultimately, the decision to take out a reverse mortgage is one you should weigh very carefully. Though it’s an easy way to get cash, it could put your finances at more risk in the long run. Be sure you fully understand reverse mortgage pros and cons before taking one on.