Reverse mortgage pros, cons

There are pros and cons to a reverse mortgage so before you decide to move forward you should ensure that you consider them carefully.

Reverse mortgages are only available to Canadians 55 and older who own their home. The overall amount of the mortgage is capped at 55% of the value of the home for HomeEquity Bank and 40 per cent for Equitable Bank.

The good news is that you can’t borrow more than your home is worth.

How close you’ll be able to get to the cap depends on your age, your equity stake, the appraised value of your home, where you live and current interest rates, among other factors.

There are only two reverse mortgage lenders in Canada. Reverse mortgages are not available for properties that are located on leasehold land but there may be other options available.

You can access HomeEquity Bank directly or through a certified mortgage broker while Equitable Bank is only accessible through mortgage brokers. A reverse mortgage is a niche product and it’s important to get impartial advice to ensure that you know all of your mortgage options.

Here are some of the pros and cons to consider.

Pros

• You don't have to make any regular mortgage payments
• You may turn some of the value of your home into cash, without having to sell it
• The money you borrow is a tax-free source of income
• This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting
• You still own your home
• You get to stay at home. This is very important for many people, often for sentimental reasons. According to a recent poll conducted by Ipsos for HomeEquity Bank, nine in 10 Canadian aged 65 and over feel that way.
• You can decide how you receive the funds – in a lump sum advance, via regular monthly advances or a combination of both.
• Leaving no inheritance and maintaining financial independence is arguably preferable to having to borrow from family to pay your bills in old age.
• Boomers are the perfect generation to take advantage of reverse mortgages. Many of them, especially in Vancouver and Toronto, own homes that have doubled or tripled in value since they bought them. That appreciation is basically money for which they did not save and that they can now access for cash.

Cons

• Interest rates are higher than most other types of mortgages
• The equity you hold in your home may go down as the interest on your mortgage adds up throughout the years
• Your estate will have to repay the mortgage and interest in full within a set period of time when you die. Generally within six months although that can be extended for extenuating circumstances.
• There may be less money in your estate to leave to your children or other beneficiaries
• Costs associated with setting up a reverse mortgage are higher compared to a regular mortgage

As with any mortgage products, it’s important to understand all of the terms and conditions. This is where the independent advice of a mortgage broker can assist you in understanding how a reverse mortgage works and the costs associated with obtaining a reverse mortgage.

If you would like more information about reverse mortgages please visit my site at www.reversemortgage-experts.ca or give me a call at 1-888-561-2679.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.