Lately, I have been receiving questions from clients about reverse mortgages. They've heard the term and are interested in finding out more. They want to know how reverse mortgages work, what the qualification criteria are, and if there are any drawbacks to them (I've learned that there are a lot of misunderstandings about reverse mortgages).
Since you're reading this, chances are that you probably have some of the same questions. And you may have even searched the web in an effort to get answers. The problem is, when it comes to reverse mortgages, there's a lot of conflicting/incorrect information out there. So you are left with trying to sort through what is correct and what isn’t.
A look at the facts…
Some 91 percent of Canadians over the age of 65 want to stay in their home throughout retirement but with record household debts and limited pension plans available, the dream of doing so is becoming more challenging.
In Canada, 15 percent of seniors have a mortgage, compared to 34 percent of non-seniors, according to a HomEquity Bank study which analyzes Canadian seniors’ financial health and their ability to retain and maintain a home.
Canadian seniors have an average debt balance of $29,973. Of that total, mortgage debt contributes a whopping 48 percent, or $14,480.
After mortgage debt, Home Equity Lines of Credit contributes the most substantial share of seniors’ debt at 23 percent on average. Auto loans follow at 11 percent.
There are several factors that are making it increasingly difficult for Canadian seniors to keep their homes: rising debt levels, a lack of long-term savings, longer life expectancies and less-comprehensive pensions.
Senior parents assist their first time home buying kids with their downpayment, or they often care for aging parents which carry both a financial cost and a time commitment.
There are more “grey” divorces and women who often don't have a good pension, find it hard to make ends meet on government benefits.
For 77 percent of seniors, their primary source of income is the Canada Pension Plan. Some 73 percent rely mostly on their Old Age Security pension.
Seniors have such a deep sense of obligation to pay their debt; they will forego repairs to their home, medication and/or food, which all have a significant impact on health and stress.
A great majority of seniors express a strong preference to remain in their homes, and “age in place”. How do they afford this goal on a fixed income? Short of selling their home, their options are limited to borrowing. But seniors need to know that there are options and solutions to help them, and a reverse mortgage is one of the options.
What is a Reverse Mortgage in Simple Terms?
A reverse mortgage is designed exclusively for Canadian homeowners who are 55 years or older.
To be eligible:
- You and your spouse (or anyone on title) are 55 years and older
- Your home is your principal residence
- Any loans secured by your home must be paid for with the new reverse mortgage (e.g. mortgage or home equity line of credit). Whatever is leftover can then be used as you wish.
You can receive up to 55% of your home value, but the specific amount is based on the following:
- Your age and that of your spouse
- The location of your home
- The type of home you have
- Your home’s current appraised value
Contact me and I can quickly give you an estimate of how much you may be approved for.
Benefits of a Reverse Mortgage
No payments are required while you or your spouse live in your home.
You receive the money tax-free. It is not added to your taxable income so it doesn’t affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) government benefits you may receive.
You can use the money any way you wish. Some of the common reasons are but not limited to:
- Pay off your existing mortgage or other debts (car loan or credit cards) to free up cash
- Additional income to supplement your pension during your retirement years
- Renovate your home to make it more accessible
- Help your children or grandchildren with an early inheritance or gift
- Unexpected medical bills or healthcare
You maintain ownership and control of your home. All that’s required is that you maintain your property and stay up-to-date with property taxes, fire insurance, and condominium or maintenance fees while you live there.
Disadvantages of a Reverse Mortgage
Reverse Mortgage rates are higher than regular mortgages because there are no payments required. Cost of a reverse mortgage can be up to $2500, which typically includes an administration fee, home appraisal fee, and fee for independent legal advice.
The amount you can borrow through a reverse mortgage varies dramatically based on geographic location, the type of housing you own, your age and gender, and the amount of your current debt. A reverse mortgage may not be an option depending on these circumstances.
Reverse Mortgage vs. Home Equity Line of Credit (HELOC)?
Four in five seniors own their own homes and one in three owns that home outright. Here's the question: should they use home equity lines of credit (aka HELOCs) to help handle cost-of-living expenses in retirement and emergencies such as a roof repair, major dental work or a big hospital bill? Or is a reverse mortgage a safer way?
Home Equity Line of Credit
- Monthly interest payment
- Must qualify based on your income
- Take money when you need it
- Rate is based on Bank “Prime” and can change as Prime rate changes
- The lender can change the terms and interest rate, as well as the limit
- Considered a “demand” loan and can be called by the lender at any time, for the full amount
- No monthly payment
- You do not qualify based on your income
- Tax-free cash in a lump sum or take advances…some now and more later
- You choose a fixed or variable rate term
- Interest rates are slightly higher than a conventional mortgage because there are no monthly payments
- You must maintain the home and keep your property taxes and home insurance up to date
As we get older, perhaps the most significant difference between a reverse mortgage and a line of credit is that you do not have to qualify for the reverse mortgage and there are no payments.
While a reverse mortgage may be more expensive, it exposes a senior to no risks while also providing an income stream. Making the right choice is based on the individual’s needs and circumstances.
Case Study on How a Reverse Mortgage Helped a Senior
While there are many examples of how a reverse mortgage can help people, this one written by my co-worker, stands out in my mind:
Mrs. Smith (not her real name) came into my office in tears. She thanked me up and down and said that doing a Reverse Mortgage (RM) was the best thing that has ever happened to her. She is a 75-year-old widow living with her adult son who is disabled. When her husband (now deceased) retired he took a lump sum retirement package which did not leave her with any survivor benefits or ongoing pension when he became deceased.
She has never worked so her widow’s pension of $197 per month + $500 rent that her son gives her monthly + OAS adds up to a total of $13,000 annually. She has been struggling financially to pay a $191,000 mortgage on this meager $13,000 annual income. So much so that every dollar she brings in is strictly accounted for.
A year ago she did not have enough money to renew the license for her car so she had to give up driving her car. The only pleasure she had was going to weekly bingo for which she budgeted $25 per week. But she had to give that up as well, as the mortgage payments + utilities + cost of living left her no money to go to bingo.
Fortunately, she met me and once we determined that a reverse mortgage was possible, the deal was completed. The client is living stress-free knowing that there are no mortgage payments to make.
Last Sunday was her first time going back to bingo after not being able to afford to go for over a year. She budgeted $100 to treat herself as she hadn’t been in so long and she ended up winning $150.00.
So, while there are many people that a reverse mortgage may not work for, but Mrs. Smith is one of the many can start enjoying life again!
Frequently Asked Questions
Can I use a reverse mortgage to pay off an existing mortgage?
Absolutely, in fact, this is one of the most common uses. The only catch is that any outstanding loans secured by your home (e.g. existing mortgage or home equity line of credit), must be paid out with the proceeds of the reverse mortgage. Any funds remaining can be used as you wish.
Do I have to make any payments?
There are no monthly payments required until you move or sell your home.
Can I repay some of the money I borrowed if I want to?
No regular payments are required as long as you live in the home, but if you choose to make a payment, you can pay 10% of the amount owing once per year.
If I want to pay more than 10% each year, is there a penalty?
Just like a regular mortgage, there is a penalty if you repay the balance in full. The penalties vary based on where you are in your term (i.e. 1 year, 2 years, etc.) and the reason for payout (i.e. death, moving to a nursing home).
Will my Government benefits be affected?
No, reverse mortgages do not affect any government benefits you may receive, such as Old Age Security (OAS), Canada Pension Plan (CPP) or Guaranteed Incomes Supplement (GIS).
Can I lose my home?
The bank does not own your home, you do! You will remain the owner and you have the freedom to decide when and if you want to move or sell.
Will I owe more than the house is worth?
Over 99% of homeowners have money left over when their reverse mortgage is repaid because:
- you are only able to take a maximum of 55% (33% on average) of your home’s value
- most homes continue to increase in value
Can the bank force me to sell or foreclose at any time?
A reverse mortgage is a lifetime product, and as long as property taxes and insurance are in good standing, the property remains in good condition, and you are living in the home, the mortgage will not be called even if the house decreases in value. You stay in the home as long as you like.
What if my spouse is under 55 years?
If your spouse is under 55 and on the title to your home, you will not qualify for a reverse mortgage.
If my spouse passes away, I will be stuck paying the loan?
Surviving spouses can choose to remain in the home without having to make any payments unless they choose to sell the home.
CHIP Reverse Mortgage
The Chip Reverse Mortgage is one of the reverse mortgage products available in Canada, and it is offered by HomEquity Bank.
I do not work for HomEquity Bank, but rather I am a licensed mortgage professional with Verico Paragon Mortgage Inc. I can offer you mortgage financing options through many lenders, and HomEquity Bank is one of them.
And best of all, my services are free to you!
My goal is to help you stay in your home – remain independent – maintain your financial freedom.
And enjoy your life…you deserve it!
Is a Reverse Mortgage Right For You?
- Call me for a free assessment to discuss your needs and your particular situation
- If you decide to proceed, I will arrange for an appraisal of your home
- I will help you complete an application and answer any questions you may have
- Before you make a commitment, you are required to seek Independent Legal Advice from your lawyer
- You receive your tax-free money!
Need More Information?
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BC & Alberta Mortgage Broker
When I'm not breaking the knuckles of different lenders for better mortgages for my clients - I'm kidding (or am I?) - you can usually find me visiting with friends or family, writing for this blog, or doing my best to keep from capsizing a dragon boat!
This is very interesting, what you’ve written, but I do have some questions, regarding a reverse mortgage.
I’m 63 years of age, and fully own a freehold apartment worth $270,000 approximately.
Presently, I receive PovertyReduction Assistance from BC government; and have applied for disability. Should I be accepted for this, are they both considered GIS? If so, then they won’t be affected by a reverse mortgage? This is crucial to me, as I’ve heard conflicting answers here.
What is the least amount I can borrow?
I understand you advice seeing a lawyer before a decision is made…but how will I pay for one before I get a loan?!
If I pass on, my son is the only beneficiary, so will he get the remaining amount after the flat is sold? This is a 55+ complex, so he wouldn’t be able to live in it. No renting allowed either. You mentioned one can pay off 10% each year without penalty…so if I passed on unexpectedly in 2 years, for example, would there be a penalty to pay off the whole loan when sold immediately?
Concerning this government aid, every month I must fill out a form for Poverty Reduction Assistance, and state if I have received any other income, or sold anything. What happens then? I’m so afraid they will stop paying me what I rely on solely.
If all this is possible, then can I have the monies put into my son’s account?
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