First of all, it’s important to understand just exactly what a reverse mortgage is. It is a type of mortgage which allows a homeowner to borrow money against the value of their home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. In Canada any homeowner older than 55 can access up to 50 per cent of their home’s equity.
However, recent reports reveal that should the home owner be required to move out of the home (for assisted living or nursing home care), the mortgage also becomes due. So, dependants cannot remain in the home and assume the reverse mortgage. This can pose serious financial issues of repaying the reverse mortgage and paying the high costs associated with a care facility.
Reverse mortgage providers tout the benefits:
1) The home owner can use the equity built up in their home to finance repairs, medical bills, or vacations
2) There are no regular payments required until the homeowner moves out or sells the home
3) Interest rates are lower than a loan or a line of credit
4) In Canada, the proceeds from a reverse mortgage are not taxable
5) Unlike most loans, there are no medical, income, or credit qualifications
6) The money can be used for low-risk investments to improve the homeowner’s monthly cash flow
Sounds ideal. However, Canada Mortgage and Housing Corporation provides some cautions. Although some of the equity in the home can be converted into cash for home repairs or extra income, it comes at a cost. There are lots of upfront charges and the interest can erode the equity in the home. This could leave a homeowner with limited options if the property had to be sold to provide alternative living arrangements.
So, when is a reverse mortgage recommended? It may be a better alternative to depleting a homeowner’s investments or it could provide extra income to offset increasing day-to-day living expenses. It provides an alternative to selling the home and downsizing. It could be an effective way to put the home’s equity to use in the homeowner’s retirement years and it may be an effective way to pay off high-interest debt, such as loans or a line-of-credit.
Conclusion: A reverse mortgage can be a good option for some.
· If a homeowner is happy with their current home and does not want to move, a reverse mortgage could be a better alternative to help finance necessary repairs or to make upgrades that will enhance the home’s equity.
· For a homeowner who is currently servicing debt, such as a line of credit, a reverse mortgage may be a smart way to eliminate the debt and the high interest costs associated with it.
· When income from RRSP savings just aren’t enough to meet the homeowner’s basic living needs, a reverse mortgage may provide additional income to improve cash flow.
Reverse mortgages can offer financial solutions to homeowners. But homeowners need to weight the benefits and risks carefully and make smart decisions based on their financial needs. And discuss your plans with an independent advisor to be sure your plans are sound. For complete details on Canada Mortgage and Housing CHIP Reverse Mortgage, visit their website www.chip.ca/chip-reverse-mortgage/.
Agingparents.com – Hidden Truths About Reverse Mortgages
Condo.ca – The Reverse Mortgage: Approach With Caution