Ads for reverse mortgages have been floating around more often lately. They’re a great option for many, but there are also some misconceptions leaving people wondering, “what are the disadvantage of a reverse mortgage?”
A reverse mortgage is not too difficult to understand, but there are pros and cons that go along with one (just like with any loan) that can make the difference between this type of product being right for you or not.
What is a Reverse Mortgage?
A reverse mortgage allows a homeowner to borrow money back from the bank based on the equity in their home. In Canada, reverse mortgages are available to homeowners over the age of 55.
The equity in the home is the amount that you actually own. What’s left over from the total value of the home is what you still owe your lender as a mortgage. So, a person with 100% equity no longer owes anything on the mortgage.
Are you still wondering what a reverse mortgage is? It’s a loan for an amount of anywhere up to 55% of the current value of the home. For some homeowners, this can amount to a lot of money. Especially in big metro centres like Vancouver or Toronto where home values have increased substantially.
The best part of all is that, believe it or not, there’s no monthly payment, and the mortgage isn’t qualified based on your income. That’s because the amount owing on a reverse mortgage is collected only when the homeowner passes away or moves out of the house – unless they default on the loan agreement.
Of course, the longer the homeowner goes without paying monthly fees, the more interest will accumulate, which will be payable at the closing of the loan.
If the house is sold, the lender collects the loan amount (plus interest) in the same way that a bank would retain what is owed on a mortgage after a sale.
In cases where there’s more than one homeowner, the balance is not due until the last homeowner passes or sells the home. That way, no one is left stranded and without their home in the midst of an already sad situation.
Why Would I Want a Reverse Mortgage?
Many may wonder what a reverse mortgage is used for, considering it can be a large sum of money.
Lots of people use a reverse mortgage to be able to afford to stay in their own homes for longer after retirement as an alternative to downsizing. Some even rely on the equity in their home to afford home health care assistance or other unforeseen health expenses that are not otherwise covered.
Other people like to put the equity back into their homes in another way – by renovating to increase the value. Renovations may also be necessary simply due to the passage of time, because of new physical restraints, or as a result of changing family size.
Then again, you might want a reverse mortgage to spend your twilight years traveling the world, buying a sailboat, or fulfilling some other lifelong dream.
What Are the Benefits?
The benefits of a reverse mortgage are pretty clear. You might even think of the mortgage payments you have been paying all your life as having a twofold purpose – to provide you with a home, as well as a stockpile of assets to use later in life as needed.
This type of loan is tax-free and doesn’t affect your eligibility for Old-Age Security (OAS), Canadian Pension Plan (CPP) or any other income to which you’re entitled.
You will still own your home, and you don’t have to make any regular loan repayments if that’s your preference.
Disadvantages of a Reverse Mortgage
But of course, there are also some drawbacks that should be seriously considered.
For one, your equity stake in your home will decrease, so if you do choose to sell, you won’t get the full value. When you pass away, your heirs will receive a smaller amount and will have to sort the repayment.
One big issue with certain reverse mortgages is that it’s possible for the full balance repayment to come due before your family has been able to settle the estate. This means they may have to repay the loan out of pocket or take out a loan themselves to keep from defaulting.
Another consideration with reverse mortgages is that the interest rates on these types of products can be higher than that of regular mortgages. The interest rate is higher because of the risk for the lender. The bank needs to lend you money without receiving payment for (possibly) decades.
Is a Reverse Mortgage Right for You?
A reverse mortgage can be a great solution for some folks but not for others. Ultimately, it comes down to a numbers game and considering what you have and what the loan might cost.
There are certain scenarios where a reverse mortgage is the better option:
- Your home value has increased considerably since you initially purchased it.
- You’re able to keep up with all of the other costs of the home, including property taxes, maintenance, and upkeep.
- You don’t plan on selling any time soon.
Finding a Reverse Mortgage Broker in Vancouver
If you haven’t been daunted by the disadvantages and are still thinking, “what is a reverse mortgage in Canada, and how do I get one” then look no further because my team and I are here to help.
Taking out a reverse mortgage can feel complex and challenging, so it’s best to have a mortgage broker in BC to help guide you through the process.
If you would like to have a consultation to find out more information and ask any questions, please don’t hesitate to reach out to me anytime!