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FINANCES: Reverse mortgages


Blog by Doriana Zohil, Broker of Record/Owner | November 10th, 2019


Should we say yes?

Many people have seen ads depicting the benefits of a reverse mortgage for seniors. The message tells seniors that this type of loan allows them to remain living in their home while at the same time enjoying the home’s equity. It’s billed as financial freedom without the stress of moving or downsizing.

What is a reverse mortgage? In a nutshell, if you are 55 or older, you can borrow as much as 55 per cent of the valueof your home. Principal and compound interest don’t have to be paid back until you sell the home or upon your death. While there are definite advantages to taking out a reverse mortgage there are also some drawbacks to consider.

Advantages
  • A reverse mortgage is secured by your home’s equity. Unlike a home equity line of credit it does not require any income proof verification.
  • You don’t have to make any regular mortgage payments. You can repay the loan at any time, but you - or your heirs - don’t have to pay back the loan or interest costs until you sell the home or die.
  • You can receive the loan as a lump sum, regular payments, or a combination of the two. The money you borrow is tax-free and does not affect your Old-Age Security or Guaranteed Income Supplement.
  • The ownership of the home remains yours and the amount you owe can never exceed your property’s value.

Drawbacks
  • There are limited options as only two companies in Canada offer reverse mortgages: HomeEquity Bank and Equitable Bank.
  • Reverse mortgages are more costly than other loans or mortgages. The interest rates are higher and are compounded. There are also start-up costs (application fee, home appraisal fee, etc.), which are deducted from the principal received.
  • Borrowing against your home will impact the amount available to pass on to your beneficiaries.

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As long as you’re older than 55 and have a home that’s worth something, you’ll be approved for a reverse mortgage. Still, the high interest rates and costs associated with this type of loan should be weighed carefully against the need for ready money.


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