The Pros and Cons of Reverse Mortgages in Canada

If you’re a homeowner age 55 or older and in need of cash, you may want to consider a reverse mortgage. Reverse mortgages in Canada are a way for homeowners to access funds to cover living, travel and other expenses. And one of the biggest advantages of this type of solution is that you won’t have to make monthly payments.

What is a reverse mortgage?

Let’s start with a simple definition of what a reverse mortgage is and how it works. As you might deduce from its name, a reverse mortgage is very similar to a traditional mortgage. Instead of being used to buy a home, it’s used to take money out of the value of your existing main home.

Simply put, a reverse mortgage is a loan secured by your home. It allows you to receive up to 55% of the current value of your home. And unlike a conventional personal loan or line of credit, you don’t have to make regular repayments on a reverse mortgage.

In general, your debt is repaid upon your death or when you move out and sell your home.

Example of a reverse mortgage

To understand how a reverse mortgage works, let’s use an example. Let’s assume that a couple in their sixties own their home and have repaid the original $350,000 loan they took out when they bought it. Today, thanks to inflation and rising real estate prices, the house is valued at $600,000.

The couple wants a little extra money to be able to enjoy their retirement and take trips together. To get the money they need, they could sell the house they’ve lived in for 40 years, but they would rather stay there. With a reverse mortgage, they’ll stay in their home AND have the money they need for their projects. They’ll repay the amount borrowed and the accumulated interest only when they sell their home. So they take out a reverse mortgage of up to $330,000, or 55% of their home’s current value of $600,000.

Benefits to consider

During retirement, many people sell their home to move into a smaller dwelling. They use the extra money to finance their lifestyle. A reverse mortgage allows you to stay in your current home if you still love it. The lender can’t force you to sell or leave your property. All you have to do is continue to pay regular costs like taxes and insurance.

With this type of loan, there are no immediate repayments or monthly payments required. That leaves more money in your pocket. Of course, one of the biggest advantages of a reverse mortgage is that it dramatically increases your cash flow. That money can be used any way you want. On the other hand, there may be some up-front costs, such as appraisal fees and set-up fees.

Possible drawbacks

One of the disadvantages of reverse mortgages is that they can have high interest rates, usually 3% higher than traditional loans and at least 1%. Every month, the costs add up. So, when the time comes to repay the loan, you may find yourself with a large sum to pay.

It’s also worth considering your potential heirs and their inheritance before committing to a reverse mortgage. If you take out a reverse mortgage, your heir could end up inheriting this debt when you die. They may have to sell the house to cover the costs. In the end, they would inherit only a fraction of what you originally hoped.

Is a reverse mortgage right for you?

It’s important to note that if you need money during retirement, a reverse mortgage is just one of many options available to you. There are many other financial services and solutions, such as personal loans and home equity lines of credit, which can offer more attractive terms and rates. Another option would be to sell the property, use this amount to buy a smaller home or one that is located further away and keep the remaining cash for lifestyle.

When taking out a mortgage or any other type of loan, it’s important to compare mortgage providers to find the best option for your needs. There aren’t many financial institutions offering reverse mortgages in Canada, but there are a few like Equitable Bank, so be sure to take the time to compare them.

A reverse mortgage could provide you with additional funds and make your retirement more enjoyable and comfortable. However, it’s not always the best option for everyone. You’ll need to think about things like inheritance and your plans for the future before applying.