Reverse Mortgages- Are they a good idea?
Lately, when I turn on my TV, I’ve been seeing “Reverse Mortgage” advertisements more often. But what exactly is a Reverse Mortgage? And how do you know if a Reverse Mortgage is right for you?
What is a Reverse Mortgage?
The basic concept behind a Reverse Mortgage is to allow a homeowner access to the money (“equity”) from their home, without having to sell their home. In Canada, you must be at least 55 years of age to be eligible for a Reverse Mortgage.
Based on certain criteria, a lender would determine what percentage of the current value of the home the homeowner could borrow. With a Reverse Mortgage, there are no fixed monthly or bi-weekly payments; the homeowner is only required to make payments when the loan becomes due.
A Reverse Mortgage typically becomes due for one of the following reasons:
- The homeowner moves out of the home (ex. Moving into Assisted Living);
- The homeowner sells the home; or
- The homeowner passes away (in the case of spouses, when the last spouse passes away).
Things to consider
It is important to note that the interest rate on a Reverse Mortgage is higher than a conventional Mortgage. It is equally important to understand that the balance owing on a Reverse Mortgage will grow significantly over time. This can happen easily if there are no payments being made, because the interest compounds. So, it’s possible that all of the equity in a home could be eaten up when a Reverse Mortgage becomes due. If a homeowner decides later that they want to downsize, it is possible that a Reverse Mortgage could limit the homeowner’s ability to do so.
Some other critical information is as follows:
- There is a requirement that the homeowner(s) live in the home for at least 6 months out of the year.
A homeowner may not be eligible for a Reverse Mortgage, if they are someone who often travels for extended periods of time, or someone who has a “winter home” out of province/country.
- The home cannot be left unoccupied for 30+ days.
If the homeowner becomes ill and ends up being hospitalized for a prolonged period of time, they may no longer be eligible under the terms of the Reverse Mortgage, and may end up being in default.
- A homeowner looks into applying for a Reverse Mortgage and decides not to proceed with the loan.
The homeowner will likely still bear some significant up-front costs, such as the lender’s requirement for an appraisal, and the fees associated with receiving Independent Legal Advice from a lawyer.
Example: widowed homeowner
Here is a scenario where a Reverse Mortgage proved to be appropriate:
A widowed homeowner, age 75, has a home valued at $250,000.00. They were in debt for a Home Equity Line of Credit (HELOC) in the amount of $70,000.00. Retirement savings had been depleted by the late spouse and the homeowner was in danger of foreclosure. They obtained a Reverse Mortgage and were able to access $75,000.00 of the equity in the home. The HELOC was paid off; they avoided foreclosure and were able to remain in the home.
There are however, plenty of scenarios where a Reverse Mortgage seems appealing, but once all possible options have been explored, is no longer the best idea.
While the idea of accessing the equity in your home may sound like a good idea, a Reverse Mortgage is not for everyone. If you are ever contemplating the idea of obtaining a Reverse Mortgage, be sure to speak to your lawyer first. Once a lawyer fully understands your situation they can help you determine whether or not a Reverse Mortgage is the appropriate way to go.
Ashton graduated from Robson Hall at the University of Manitoba in June 2016 with her Juris Doctor in Law and was admitted to the bar in September 2017. She specializes in the areas of Wills, Estates, and Real Estate in her practice.