Reverse Mortgages in Canada: Explained in 5 Minutes

Purchasing a home requires careful financial planning – but monetary obligations do not stop there. Owning a property is an asset but being a homeowner does not help to manage your day-to-day bills and expenses. In fact, many Canadians would classify themselves as being “house poor”, which can put strain on budgets and portfolios – but a reverse mortgage can help!

By taking a reverse mortgage, Canada’s homeowners can consolidate debts, fund renovations or cover medical and educational costs by accessing the equity in your home. Having to sell your home is an unfortunate last resort for many Canadians. Before committing to an unwanted downsizing or involuntary move, consult an expert to see if you qualify for a reverse mortgage loan.

What is a Reverse Mortgage?

All homeowners are familiar with the idea of a traditional or regular mortgage, but reverse loans are less common. A reverse mortgage is a type of loan that allows property owners to pull equity from homes without having to sell or vacate. Also known as an “equity release”, these loans allow borrowers to tap into established equity without taking on another monthly payment. This particular type of loan comes with distinct advantages, particularly for owners who have the majority of their wealth wrapped up in their property.

reverse mortgages

When Do I Need a Reverse Mortgage: Unexpected Costs During Retirement

Try as you might, proper retirement planning involves a lot of guess-work. According to a recent CIBC poll, nearly half (48%) of retired Canadians left the workforce sooner than expected. An early retirement will have an impact on monthly budgets and the ability to accommodate emergency situations. Some of the most common unexpected expenses facing retired Canadians are:

Home Maintenance & Renovations: Over time, homes, their construction materials, fixtures and appliances become outdated. The cost of replacing an aging roof is in the thousands. Being faced with rotten window frames or a leaking roof can mean going out of pocket for necessary repairs.

Personal Emergencies: It is an unpleasant thought but nearly every Canadian has been met with an unexpected emergency. This could mean travelling to accommodate a sick or injured relative or having to take on a prolonged absence while dealing with property or legal disputes. The costs of this can become crushing very quickly.

Fraud: Canadian retirees are always at risk of fraud. Between January 2014 and December 2017, Canadians lost more than $405 million to scammers. With the rise of the digital age, there are more and more ways for scam artists to connect with homeowners and their main target seems to be retirees. Even a small scam can lead to significant hardship for pensioners and a reverse mortgage is one option for mitigating this financial fall out. To help you avoid, detect, and report fraud, HomeEquity Bank has recently launched Catch the Scam, a series of online classes led by Frank Abagnale

Longer Life Expectancies: A long life is a blessing but no one expects to live forever. Depending on the type of retirement planning at play, it is very possible to outlive your retirement savings. As seniors age, they will likely be faced with an increase in medical bills. This is why it is important to over-plan your retirement, as well as keeping secondary options in your back pocket, such as reverse mortgage options.

How Do These Loans Work?

Reverse mortgage lenders offer loans for up to 55% of the appraised value of the home. This amount must cancel out any outstanding mortgages or loans attached to the home. Once these debts are cleared out, the remainder can be used at the discretion of the borrower. This can mean the opportunity to pay property taxes and other debts; to paying a semester at college or making an investment that you’ve always wanted to make.

Instead of having to repay the loan in monthly instalments, the principal and interest of a reverse mortgage loan are paid out when: the home is eventually sold, or the last borrower dies. These payments can be taken in a lump sum or can be divided into monthly instalments. In order to qualify for one of these specialized loans, borrowers must be 55+ years old and provide documentation to financial institutions detailing the age of borrowers, along with the value, location and condition of a home.

How To Get A Reverse Mortgage

Now that you understand how a reverse mortgage works, it is important to know how to turn these ideas into a financial reality. Throughout Canada, there are several places to get a reverse mortgage. Not all financial institutions offer reverse mortgages, but there are several programs committed to just that.

HomeEquity Bank offers potential borrowers the Canadian Home Income Plan (CHIP) reverse mortgage options, while Equitable Bank offers a similar scenario for borrowers. The simplest way to navigate this type of loan is to seek out the services of an experienced mortgage broker. Instead of chasing separate financial institutions or programs, a mortgage broker can track down, prepare and secure a reverse mortgage.

Reverse Mortgages: The Finer Points Of Your Loan

It is always important to consult with an expert before committing to any financial decision. A reverse mortgage is great for pulling equity out of your home to cover unexpected costs, or even add value to a home. With no regular monthly payments, this loan type will not put financial strain on your household. This money is not taxable and does not impact old-age benefits for seniors.

Due to the nature of these loans, reverse mortgages come along with higher interest rates than traditional lines of credit. Repayments must also be made within a certain time period after the sale of the house or following the death of the last borrower. This can mean complex estates take longer than the allotted repayment period, leaving relatives to repay the loan until funds become available.

If you feel that a reverse mortgage is right for you, consult a mortgage broker today. Highly-trained experts understand how to connect potential borrowers with lenders that will best suit their needs.

Reverse Mortgages in Canada: Explained in 5 Minutes