You have reached the point in life where it’s time to start collecting your pensions, tally what investments you have and prepare for your “golden years.” Like most Canadians, you are likely to have a huge chunk of your equity tied up in your home.
A reverse mortgage is an increasingly popular consumer loan for Canadian homeowners who are at the age of 55 or over. It allows these homeowners to tap into the equity they have built up in their homes.
Unlike conventional mortgages, there are no monthly payments, unless the homeowner seeks an agreement to make them. Homeowners are still responsible for paying property taxes, insurance and maintenance.
The repayment of the loan is deferred until the homeowner sells, moves out or passes away.
To qualify for a reverse mortgage, you must own a home, be at least 55 years old and have enough equity built up in your home. The amount of tax-free cash available is based on the owner’s age and the appraised value of the home. The loan is repaid when the home is sold, or the last of the borrowers moves out or dies.
Like any decision one makes, research should be done and due diligence undertaken before one decides to take on a reverse mortgage,
The factors that make such mortgages appealing include the fact that the mortgagee continues to live in the home and retain title.
Recipients receive the proceeds of the loan as tax-free cash and can use the money as they see fit.
As mentioned before, there are no standard monthly mortgage payments until the homeowner decides to move or sell.
Payments could be beneficial, however.
For one, it results in a reduction of the amount owing at the end of the reverse mortgage.
There is also the comfort of knowing the interest payment is a fixed amount that can only change if the homeowner chooses to access more funds or switch interest rate options during the year.
As well, there is the security of knowing that pre-authorized payments can be stopped at any time without affecting the reverse mortgage.
A reverse mortgage is considered a non-recourse loan; meaning neither the homeowner nor the heirs are liable for any amount of the mortgage that exceeds the value of your home, as long as property taxes and insurance have been paid.
There are options on how the funds are received. There is the flexibility to either get them all at once or receive advances over time
Because there are no monthly mortgage payments required, interest rates can be higher for a reverse mortgage than other secured lending options.
The balance of the loan increases over time as does the interest on the loan.
The process of getting a reverse mortgage loan is relatively straightforward.
The homeowner should research and find the company that he/she feels would be the best to deal with.
If a decision is made to proceed, a mortgage specialist will assist in arranging an independent appraisal of the home.
Before everything is finalized, an independent lawyer of the homeowner’s choice is required.
The homeowner then receives the tax-free money. What the homeowner does with the funds is up to his or her discretion.
There are a number of avenues open and here are just two examples.
Let’s say someone wants to upgrade to a nicer home.
The homeowner can use the proceeds from the sale of the present home as a down payment on a new home. They can then apply a reverse mortgage on the new home to complete the purchase and let them live without mortgage payments.
Someone could use a reverse mortgage to acquire a vacation property while keeping ownership of their Canadian property.
A reverse mortgage can give a client the funds and freedom to purchase a second property.
A reverse mortgage could also be used to unlock equity in the homeowners’ property which could give them the opportunity to help their children or grandchildren break into the real estate market.
There is the common axiom that a man’s home is his castle. With the advent of reverse mortgages, the castle can also be a portal to a brighter and more diverse future.
WRITTEN BY: DAN PELTON | RESOURCES: RELIANCE MORTGAGES
