As our senior citizen population expands amidst widespread financial challenges, you might be wondering, how will this significant population financially sustain themselves, post retirement?
One practical option for those seeking a source of income at this stage of life is a reverse mortgage.
What’s a Reverse Mortgage?
A reverse mortgage is exactly what it sounds like; a mortgage that works in reverse by allowing you, the homeowner, to access the equity you have built up over the years. You will receive cash from the lender in exchange for a portion of your equity on the home. Your home equity is whatever the value of your home is, minus what remains to be paid off from your mortgage. You can choose to receive a lump sum payment (all at once), scheduled payments similar to a regular income, or a combination of the two approaches.
What are the benefits of using a reverse mortgage?
- It’s completely tax free.
- You don’t have to make regular payments as you would with a typical loan.
- The repayment options and advances are flexible.
- You don’t have to sell your physical home––you are just drawing cash out of its value.
- There is a no negative equity guarantee. This means that your administrative fees and closing costs are drawn from your funds directly, so there is no need to worry about paying out of pocket.
- If you choose this route, you are not sacrificing your eligibility for Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
Sounds Great! What’s the Catch?
There are a few possible disadvantages to keep in mind.
- When using a reverse mortgage, the interest rate is a bit higher than it would be for a typical mortgage.
- There are also a few costs associated with the process that you will want to consider.
- The home appraisal fee generally falls somewhere between ~$175 to $400
- The legal fees can add up to~ $300 to $600
- The closing and administrative costs can come to ~$795 to $1,495. This number is dependent on the length of the reverse mortgage term.
Some Things to Be Aware Are…
After you’ve passed on, your estate will be responsible for the costs. This means that you may end up leaving less behind for your loved ones and beneficiaries than you intended. Additionally, it’s possible that the time needed to pay back the reverse mortgage could be exceeded by the time needed to settle an estate. Note also that, with a reverse mortgage, interest accumulates and your equity in your home decreases as time goes on. And lastly, you must meet a set of eligibility requirements to qualify.
Are you eligible for a reverse mortgage? You must…
- Be Canadian.
- Be 55+ years of age.
- Live in British Columbia, Alberta, Ontario, or Quebec.
- Have a home located in a major urban centre.
- Reside in your home more than 6 months out of the year.
- As well…
- Your home must have a value of $250,000+.
- If there is more than one title holder of the residence, they must apply as joint borrowers on the reverse mortgage.
Note that you do not need a verifiable income to apply, as the payments from the reverse mortgage will be your income. However, you may be expected to settle your debts prior to applying.
I’m eligible! Now how do I apply?
- First, study up on your options. Ask questions and know the pros and cons up front.
- Get in touch Ratefair by calling 780-993-8123 or using our contact form to reach a representative by email.
- Now, it’s time to gather your documents and get organized.
You will need the following:
- Proof that you are able to afford expenses like property taxes, utilities, and condominium fees.
- Have debt secured on your home? You will need supporting statements.
- Have secondary properties? You will need your mortgage information.
- Have you granted an attorney or agent the legal capacity to oversee your property in the event that you are unable to do so? You will need a Power of Attorney (of property) document.
- Next, you will want to get your home appraised so that know exactly how much you qualify for.
- Lastly, you may wish to seek legal and/or financial advice to help guide this process so that you feel confident and protected.
What Are My Other Options?
If a reverse mortgage doesn’t sound like a good match, you may prefer to use a Home Equity Line of Credit. With this option, you can withdraw funds on a regular basis until you have reached the limit of the Home Equity Line of Credit. You may find this option more desirable if you are seeking a lower interest rate, but it can be more challenging to qualify and there is no fixed payment, so you may need to monitor your budget more carefully. A line of credit usually entails making consistent repayments, not to mention that you will need a strong, verifiable income to even qualify.
If neither of these routes sound like the perfect fit, perhaps a smaller and/or less expensive home will fit just right.
Be sure to reach out for assistance and consider your options carefully. An informed choice is usually the best one.