For the average Canadian senior approximately 60 to 80 percent of their wealth is tied up in their home. For seniors with low income, accessing cash in times of need can be a real challenge. An increasing number of seniors have become house-rich and cash poor, and their financial state is challenged by the fact that most banks won’t consider giving a loan to someone with little to no real monthly income.
For many seniors the answer to being cash strapped is what is called a “reverse” mortgage. A reverse mortgage is a loan against your home that you do not pay back for as long as you live in the house. Reverse mortgages allow you to turn the equity of your home into cash, without having to move or to repay the loan each month. Typically you don’t have to pay the loan back until you die, sell your home, or permanently move.
The reverse mortgage may sound like a dream-come true for many people, but it is important that you understand the benefits and disadvantages before entering into such an agreement with your bank.
The Details
To qualify for a reverse mortgage banks typically require that you be at least 62 years of age and both own and live in your principal residence. Depending on your age, you may be able to access between 20 to 30 percent of the assessed value of your home. The older you are, and the more valuable your home, the larger the percentage you can usually access.
Reverse mortgages are usually paid out in a lump sum. You should check with your financial institution or planner for more information about reverse mortgages. Not all provinces in Canada have approved reverse mortgaging your home. The terms and conditions of a reverse mortgage are dependant on the issuing bank.
Benefits
The benefit of a reverse mortgage is cash on hand during your retirement years. Once you have a reverse mortgage you get to decide specifically how you will use the money, and unlike regular loans you don’t have to make monthly repayments. Whether you use the money to pay bills, renovate your home, pay for health care or travel the world, a reverse mortgage allows you access to the equity in your home, while you continue to live in it.
Disadvantages
It is important to know that while reverse mortgages sound promising, they have their disadvantages. Reverse mortgages are relatively expensive, have high interest rates and there are very few reverse mortgage lenders.
By drawing on the equity of your home you are depleting the value of your house should you need or want to sell. If you take out a reverse mortgage then need to sell your home due to health concerns, you could be left without enough money to cover the costs of alternative accommodation later in life. And if you take out a reverse mortgage too early in life you may still be relatively young by the time the equity in your home is gone. If it is important to you to leave an inheritance or estate for your family, then a reverse mortgage may not be the right choice for you.
It is also important to note that lending banks can request repayment of the mortgage if you fail to keep the property insured, fail to pay your property taxes, fail to maintain the property, or if you abandon the property, declare bankruptcy, or commit fraud. Banks may also request repayment if your home is condemned or if you add a new owner to the property’s title, sublet the property, change the property’s zoning classification, or take out additional loans against the property.
Consider the Options
Before jumping into a reverse mortgage consider all the options available to you. Experts agree that a reverse mortgage is often best considered a last resort. Other options such as lines of credit, re-mortgaging and investing, renting out a portion of your home or selling your house and investing the earnings, are often considered better financial options. Take the time to discuss your options with a financial planner, friends and family before jumping into any financial decision that may impact the comfort of your future.
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