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Reverse Mortgage

Reverse mortgages are commonly used in the following two scenarios:

  • A homeowner wants to access the equity in their primary residence to meet their needs without having to qualify for mortgage financing using traditional lending guidelines.

  • As more people carry mortgages into retirement, homeowners can use reverse mortgages to pay out conventional mortgages. The advantage to doing so is that a traditional mortgage requires a monthly principal and interest payment, whereas a Reverse Mortgage does not.

 

A Reverse Mortgage can also be a great tool to help people remain in their homes as long as they want to. Many Canadians over 55 find their expenses increasing faster than their indexed pension income. When this happens, either debt accumulates on credit cards or lines of credit, and each requires a minimum monthly payment. This type of debt can often be challenging to pay off, adversely affecting monthly cash flow and leaving the borrower stuck making minimum monthly payments indefinitely.


In too many cases, adults over the age of 55 are simply choosing to go without having their basic needs met. In many of these situations, though, they are living in a home that is just about paid off or may, in fact, be owned free and clear.

While we recognize that the old-school way of thinking was always to leave as much as possible for the children, it can translate to parents living with all kinds of financial and even medical stresses that their children are unaware of.

 

Many of our parents followed old-school thinking: keeping personal finances to themselves regardless of whether things were going well or not. In every situation we have seen, though, where adult children found out that their parents were struggling, their priority was for their parents to take care of themselves and enjoy their lives. 

Image by Agence Olloweb

MYTHS VS FACTS

MYTHS:  The bank owns the home
Fact: the homeowner will maintain ownership and control of their home. They can decide when and if they'd like to move or sell.

 

MYTHS:  Those with a reverse mortgage will owe more than their house is worth.
Fact: the homeowner will only be permitted to access up to 55% of the property value. 99% of homeowners will have equity remaining in the home when the loan is repaid. Keep in mind that while interest is accruing on any funds being used, the property also appreciates in value. In many cases, if you fast forward ten years into the future, your equity position in the home is similar to when you took out the mortgage.

 

MYTHS:  Reverse Mortgages are too expensive
Fact:
 interest rates are generally a bit higher than regular mortgages but are still reasonable. The main reason is, it's a completely different product, so comparing a reverse mortgage to a traditional mortgage is the same as comparing apples to oranges. A reverse mortgage does not require any monthly payments, nor does the client need to qualify for the financing using standard lending guidelines for conventional mortgages.

MYTHS:  Reverse Mortgages are a mortgage of last resort.
Fact:
Many financial professionals recommend a reverse mortgage because it's
 a great way to obtain tax-free cash without needing to tap into investments.

MYTHS: The homeowner cannot get a reverse mortgage if they have an existing mortgage
Fact:
Many homeowners use a reverse mortgage to pay off their existing mortgage. 

 

MYTHS: Surviving spouses are stuck paying the mortgage after the homeowner passes away.
Fact:
Surviving spouses can choose to remain in the home without making any payments for as long as they wish.

Reasons People Take Out a Reverse Mortgage

  • Purchase or refinance a primary residence.

  • Pay for medical expenses.

  • Pay off debt, do renovations or repairs, or even retrofit for mobility reasons.

  • Pay for in-home help

  • Prevents the need to cash in investments

  • Improves monthly cash flow.

  • Travel and or purchase a 2nd home in a warmer climate.

  • Helping children or grandchildren by gifting funds for a down payment (early inheritance).

 

Highlights

Funds can be taken either as a lump sum or by scheduled monthly or quarterly payments.

Does not affect existing pension income. 

No regular monthly payments are required, but they can be made.

All withdrawals are tax-free.

The mortgage is only due to be paid when the property is sold, the last borrower moves into a long-term care facility/retirement residence, or the last borrower on the title passes away.

The maximum amount you can borrow is 55% of the property value.

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