The Ultimate Guide To Reverse Mortgages For Canadians
28 August, 2018 / by Glenn Carter
The latest census report released by Statistics Canada shows that there are more senior citizens who are 65 years and above than children who are 15 years and below.
This unprecedented demographic shift can be attributed to the first baby boom generation recently turning 65 years or over, plus improved life expectancy.
And, this pattern is only expected to continue and become more pronounced over the next decade.
That means there will be more demand for healthcare and homecare as more Canadians get older past the retirement age. Old Age Security (OAS) and Canada Pension Plan (CPP) can only do so much, and sometimes the cash flow is inconsistent.
However, there are options for Canadians who are on a fixed income but have significant equity in their residential homes. Indeed, a reverse mortgage can significantly alter the financial well-being of many Canadians. Here’s how.
What is a reverse mortgage?
When you apply for a regular mortgage, you’re expected to make payments to the lender over the years in exchange for your home equity. A reverse mortgage is the opposite; it is like rewinding the tape. Instead, it is the lender that makes payments to you for an opportunity to own a part, or all, of your home equity.
After you’ve received all your payments, you don’t have to move out of your home. In fact, the loan can be repaid when you pass away or decide to sell the residential property.
To qualify for a reverse mortgage in Canada, you must be at least 55 years old and possess the title to your home. If you’re married, your spouse must be 55 years or older. Of course, your mortgaged home must be your primary residence.
The money you borrow through reverse mortgage cannot exceed 55 percent of your home value. The older you are, the more money the lender will be willing to give you. Keep in mind that the cost of a reverse mortgage loan includes the appraisal fee, interest rate, professional fees, and a closing fee.
What are the benefits?
- The payment you receive is tax-free, and it will not reflect on your Guaranteed Income Supplement (GIS) and Old Age Security (OAS) benefits.
- You’re not obligated to make consistent loan repayments. The principal amount is reimbursed with interest when you move out and sell your house or after your death.
- If you get a reverse mortgage and max out your payments, the lender won’t sanction a foreclosure to kick you out of your property. Even if the interest surpasses your home equity, you can stay in your home for as long as you want.
- Since in Canada you can’t borrow more than 55 percent of your home equity, you will still own a share of your residential property even after the payment. In case your property value appreciates over the years, you could tap into the increased home equity.
- Qualifying for reverse mortgages is straightforward. You won’t even need to make a down payment like when obtaining a regular mortgage. As long as you’re a 55+ homeowner sitting on debt-free equity, you can be eligible.
- You can decide to get the payments monthly or in a lump sum.
Why are reverse mortgages good for Canadians?
At least 425,000 Canadians are expected to retire every year. Moreover, 9.8 million baby boomers are quickly approaching the retirement age; if they have not retired already.
In fact, a fifth of Canadian baby boomers who are still working haven’t saved for retirement. And, the majority of Canadians don’t even know how much money they will need during retirement.
Not every retiree wants to do a side gig when the money runs out during their golden years to cover their lifestyle. You could opt for a HELOC, but you don’t want to be bothered repaying the immediate monthly installments. Neither do you want to move homes or end up prematurely in an elderly-assisted living facility.
So what do you do? A reverse mortgage could be the solution. Experts note that reverse mortgages can be ideal for retirees who don’t have a lot of money, but a lot of equity in their residential properties.
What are the uses of a reverse mortgage?
You can use the money you borrow through reverse mortgages for anything. For instance, if you want to go to on a dream vacation on your bucket list or do home renovations, it is all up to you. Perhaps you even want to invest in a business or pay off a few outstanding loans.
Nevertheless, most Canadian retirees use reverse mortgages for personal upkeep and lifestyle. For those that choose to get paid on a monthly basis, it is usually like they’re on a salary.
Consult a mortgage professional
Even though applying for a reverse mortgage isn’t complicated, it is crucial to consult a mortgage broker to understand the process of applying for a reverse mortgage.
Currently, there are only 2 financial institutions in Canada that offer reverse mortgages; HomEquity Bank and Equitable Bank. The Path Home Plan provided by Equitable Bank and the Canadian Home Income Plan (CHIP) amount you can borrow depends entirely on a number of factors—including age, home value, and current equity.
It is best to speak with a mortgage professional about the exact amount you could obtain as part of these lending programs.
If you’re lucky, you will qualify for a 55 percent value of your home equity, but even so, the limit depends on your age, home location, house market forecast, and type of property.
A qualified mortgage broker will help you evaluate the most suitable reverse mortgage deal, and calculate precisely how much you stand to gain from this popular financial product.