Understanding Reverse Mortgages: Key Facts Before You Decide

Reverse mortgages are often appealing to homeowners who want to tap into their home’s equity without the need to sell or relocate. However, it's critical to carefully assess both the advantages and drawbacks before committing to one. While these loans can offer helpful financial support, they also involve risks that may affect your future financial stability.

A reverse mortgage is a financial tool that enables homeowners aged 55 and older to borrow against the equity in their homes. Unlike standard mortgages, borrowers don’t need to make monthly payments. Instead, the loan is repaid when the homeowner moves, sells the home, or passes away. This option is frequently used by retirees to generate extra income, though it's important to consider the associated costs and risks before proceeding.

Reverse mortgages transform a portion of your home equity into loan proceeds, which can be distributed as a lump sum, monthly installments, or a line of credit. These funds are tax-free, and repayment is only required when you leave the property. Loan amounts depend on factors like property value, borrower age, and interest rates. One of the most common reverse mortgage products in Canada is Home Equity Bank’s “HELOC for Seniors,” although other lenders offer variations.

Reverse mortgages come in several formats to suit different needs:

• HELOC Reverse Mortgage: Offers flexible access to funds, where interest is paid only on the withdrawn amount.

• Term Reverse Mortgage: Provides a lump sum for a set term (such as 5, 10, or 15 years), ideal for those needing a substantial upfront amount.

• Lifetime Reverse Mortgage: Delivers steady payments for life, with repayment due only upon vacating the property.

• No Regular Payments: Borrowers don’t need to make monthly mortgage payments.

• Cash Access: A reliable way for seniors to use their home equity while remaining in their home.

• Tax-Free Income: Funds received are not taxable, which can help with budgeting in retirement.

• Payment Flexibility: Borrowers can choose the disbursement method that fits their needs.

• Higher Costs: These loans usually carry higher fees and interest than traditional mortgages.

• Equity Reduction: As interest accumulates, the homeowner’s equity decreases over time.

• Inheritance Impact: A large loan balance could leave heirs with little or no remaining value.

• Eligibility Restrictions: Only homeowners over 55 with qualifying properties are eligible.

• Origination Charges: Fees for processing and setting up the loan, which can vary widely.

• Interest Rates: Generally higher than regular mortgage rates due to deferred repayment.

• Insurance Premiums: Often required to protect the lender if the home value drops below the loan balance.

• Closing Costs: Include legal, appraisal, and administrative fees.

These costs should be factored into your decision-making process.

Several elements influence the loan amount available through a reverse mortgage:

• Home’s Market Value: More valuable homes usually qualify for larger loans.

• Borrower's Age: Older borrowers may access more funds due to a shorter expected loan term.

• Current Rates: Higher interest rates typically reduce available loan amounts.

• Home Equity: The more equity you have, the more you can potentially access.

Generally, reverse mortgage borrowers can access between 30% and 55% of their home’s value.

While reverse mortgages offer flexibility, there are significant concerns:

• Growing Debt: Without regular payments, the loan grows and may consume your equity.

• Benefit Interference: Proceeds could affect eligibility for government support like Canada’s GIS.

• Foreclosure Risk: Failing to pay taxes, maintain the home, or meet loan terms can result in foreclosure.

Consider other avenues before deciding on a reverse mortgage:

• HELOC: Suitable for younger homeowners or those with regular income, often with better terms.

• Selling the Property: Downsizing can provide liquidity without incurring debt.

• Government Support: Seniors may be eligible for federal or provincial programs that offer financial help.

Yes, if loan terms aren't met, such as paying taxes or insurance, foreclosure is possible.

No, reverse mortgage funds are tax-free, but they do reduce your home equity over time.

Consult a financial professional to assess your goals, plans, and equity situation.

• https://www.homeequitybank.ca/

• https://www.bankrate.com/mortgages/reverse-mortgage-pros-and-cons/

• https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html