Clients regularly ask me about reverse mortgages and if they should consider this for themselves or a family member. The main thing to consider when shopping for a reverse mortgage is to compare it to all other mortgage options available.
Reverse mortgages have been available in Canada for many years and can be advantageous to specific clients. A reverse mortgage is like a regular mortgage except that the interest payments increase and the balance owed to the bank or lender increases each year.
Reverse Mortgage Basics
- No interest or principal payment is required as long as you or your spouse live in the home.
- Access funds of up to 40% of the value of your home, this calculation is based on your age and the appraised value of the home
- You must be at least 60 years old to qualify for a reverse mortgage
- Receive funds as a lump sum or in fixed payments over time
- The funds you are accessing come from your estate, therefore no income tax is due.
- You keep ownership of your home, as long as you continue to pay property taxes, condo fees, etc.
- Interest rates are generally much higher than the best rates offered for standard mortgages.
- Set-up fees include legal fees, appraisal fees, and administrative costs that are typically slightly higher than for a standard mortgage.
The advantages of a reverse mortgage include receiving tax-free funds in a single lump sum or in multiple withdrawals without having to make monthly principal and interest payments. You retain ownership and control of your home.
Reverse mortgage disadvantages include higher interest rates and fees to set it up. You can only access up to 40% of the value of your home and both you and your spouse must be at least 60 years of age to qualify.
There are other mortgage options that do not have some of the limitations of the reverse mortgage. Consider a home equity line of credit or a standard mortgage.
mortgage
If you set up a mortgage, you will receive all cash up front, there is no option to receive funds over time. So if you set up a mortgage for $100,000, you’ll receive the $100,000 and start paying interest on this money right away. When you refinance your home this way, you generally get the best mortgage rates.
Home Equity Line of Credit
A home equity line of credit can be established with a limit of up to 80% of the value of your home. A home equity line of credit works much like a credit card, except it has a much higher limit and a much better interest rate. By establishing a home equity line of credit, you control how much funds you withdraw. You don’t have to withdraw money until you need it, and you pay interest only on the funds you’re currently using. There is a minimum payment of interest only for each month.
If you don’t need the cash right away, then a home equity line of credit is certainly an option to consider.
To set up a home equity mortgage or line of credit, you will need to pay legal fees and appraisal fees. You would receive the best mortgage rates at the time, as low as the premium plus 0.5% for an interest-only home equity line of credit.
When considering any mortgage financing, always speak with a mortgage broker or mortgage advisor to learn all of your options and review the pros and cons before signing on the dotted line.