Reverse Mortgages - How Do They Work?

A reverse mortgage allows you to release the equity you’ve built in your home by turning a portion of it into an additional source of cash. The bonus; the cash comes tax and payment free, meaning you have access to funds without the stress of meeting monthly payments whilst also retaining ownership of your home. 

If you’re a Canadian homeowner who’s at least 55 years old and live in a major urban centre in British Columbia, Alberta or Ontario, you may be eligible. If you have a spouse, both of you must be at least 55 years old. 

Essentially a reverse mortgage can help save on taxes. You can use a reverse mortgage to take cash out of your home and put it into investments. All the interest charged on the loan is then tax deductible. 

Reason’s you may want to consider a reverse mortgage:
·       Add to your retirement income
·       Pay for home improvements
·       Cover healthcare expenses
·       Help with growing living costs
·       Support your family i.e. help your children purchase real estate
·       Build a stronger safety net for emergency savings
·       Pay off your current mortgage or line of credit to maximize your fixed income
·       Maintain your financial independence and live the lifestyle you want. 

So how does it work?

Eligibility is determined using your age and a percentage of the home’s appraised value and it’s location. In general, the older you are and the more home equity you have, the bigger your loan will be. 

You may choose to get the money from your loan through:
 ·       one lump-sum payment
·       planned advances, giving you a regular income
·       a combination of both of these options. 

You only pay interest on the amount that is loaned to you, not the amount that you get approved for and you don't need to make any regular payments while you or your spouse live in your home.  You have the option to repay the principal and interest in full at any time and interest will be charged until the loan is paid off in full.  Accordingly, the home’s equity may decrease as the interest increases throughout the life of the mortgage. If you sell your house or move out you'll have to make payments. If you move, you even have the option to ‘transfer’ your reverse mortgage to a new property.  When you pass away, your estate will have to repay the loan. 

Whilst the interest rates are typically higher than most other types of mortgages, the reverse mortgage allows you to turn some of the value of your home into cash, tax-free, without having to sell it.  It’s a fantastic option to actually use the cash tied up in your asset. 

If this sounds like an option you’re thinking you would like to explore, give us call and we can put you in touch with the right people.

 Photo by Clem Onojeghuo on Unsplash