The Reverse Mortgage

What exactly is a reverse mortgage? And is it a good idea or a bad idea?

With today’s historically low interest rates and soaring real estate values, reverse mortgages are often touted as a practical solution to cash flow problems without needing to sell your home.

Reverse mortgages are strictly regulated in Canada, and as a result there are limited product options available with only two financial providers permitted to market the product – Home Equity Bank and Equitable Bank. Borrowers can choose to either take out a lump sum or draw a monthly income, but they must be aged 55 or older, and there are limits on how much you can borrow depending on your age (the older you are, the more you will qualify for) and where your home is located.

A reverse mortgage borrows against the equity in your home. Since there are no monthly payments required, the interest simply accumulates until you sell your home, you pay off the loan, or you die. Interest is only charged on the funds you actually withdraw. It’s important to keep in mind that a reverse mortgage is debt, and as such, it should be approached with caution.

What are the Risks?
     – Interest rates are higher than a conventional mortgage, sometimes even double (e.g. if you can get a regular mortgage for 2.5%, the going rate on a reverse mortgage would be closer to 5%).

     – The interest is compounded, meaning interest is calculated on interest previously charged since you are not making any payments.

     – Interest rates won’t always be this low, and the longer you hold the reverse mortgage, the greater the risk of interest rates rising over time.

What Does it Actually Cost?
There are one-time set up fees of between $1,800 – $2,500 for a reverse mortgage. In addition, just like a traditional mortgage, a home appraisal is needed and a lawyer is required to review the contract, resulting in legal fees similar to those for a home purchase (approx. $500 – $1,000).

Examples of interest costs over time:
     – A one-time, $150,000 lump-sum reverse mortgage for 17 years, with a 5% semi-annual compound interest rate, results in a balance owing of approximately $349,000 to be paid off upon the sale of your home, almost double the amount you initially borrowed.

     – For monthly withdrawals of $3,000 over the same 17 years (total withdrawals of $612,000), at the same 5% interest rate, the balance owing would be approximately $961,500, just over one-third of the total amount borrowed.

When is a Reverse Mortgage a Good Idea?
There are some situations where taking on a reverse mortgage might be a good idea:

     – For elderly clients who want to remain in their home, or “age in place”, a one-time lump sum from a reverse mortgage, or on-going monthly amounts to pay for costly in-home care, could increase cashflow and prevent them from having to sell their home

     – In a situation where one spouse is in good health and wants to remain in the family home, but the other spouse has serious health needs requiring a move to an expensive care home – a reverse mortgage could buy them some time instead of having to downsize in order to afford long-term care cost.

Feel free to reach out to us if you would like to discuss whether a reverse mortgage might be a viable option for your unique situation.

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