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As we age, retirement becomes a more prominent topic of discussion. As we plan for our retirement, it’s essential to consider all available options. One of those options is a reverse mortgage. In this article, we’ll explore the pros and cons of a reverse mortgage and help you decide whether it’s the right option for you.

What is a Reverse Mortgage?

A reverse mortgage is a financial option available to Canadian homeowners aged 55 and above that allows them to access the equity in their home. Unlike traditional mortgages, a reverse mortgage does not require monthly payments as the loan only needs to be paid back when the home is sold, or the homeowner passes away. 

Many companies that offer reverse mortgages have no negative equity guarantee, which means you can never owe more than your house is worth. To offer these guarantees, the amount of equity you are allowed to access is based on several factors, including:

– Appraised value of the property

– Location of the property

– Age of the youngest homeowner

There are limited income requirements to obtain a reverse mortgage. Ultimately, the lenders want to ensure that the borrowers can pay the property taxes and maintain the home with their own funds. In some cases, the lenders would be able to hold back a certain amount of funds and would release them on an annual basis to cover off-property tax payments.

Pros of a Reverse Mortgage

  1. Access to tax-free Cash: Reverse mortgages can provide access to cash you may need for retirement or unexpected expenses. You can receive the money in a lump sum or monthly payments, depending on your preference.
  2. No Monthly Payments: With a reverse mortgage, you don’t need to make any monthly payments. Now, if you would like to make payments, you also have that option. This can provide a sense of financial security for folks over 55 years of age who may be living on a fixed income.
  3. Stay in Your Home: A reverse mortgage can allow you to stay in your home and access the equity you’ve built up over the years.
  4. Helping your loved ones: Many individuals utilize reverse mortgages to help their loved ones with a down payment for a home or make other investments. 
  5. Your home does not have to be paid off: More and more people are entering retirement with the mortgage still in place. Despite popular belief, you do not need to be mortgage free before entering into a reverse mortgage. We have many situations where we have used a reverse mortgage to pay out the individual’s current mortgage so they can eliminate their mortgage payment to increase their retirement cash flow.

Cons of a Reverse Mortgage

  1. High-Interest Rates: Reverse mortgages typically come with higher interest rates than traditional mortgages, which can lead to a significant amount of interest over the life of the loan. It is important to know that the ownership of the home stays with you so as your home gains value, it does offset some of the interest.
  2. Reduced Equity: As you receive payments from your reverse mortgage, your equity in your home decreases. This can limit your options if you sell your home or leave it to your heirs.
  3. Fees and Charges: There are upfront fees and charges associated with a reverse mortgage, such as appraisal fees, legal fees, and closing costs. These costs can add up and reduce the amount of money you receive from the loan.

Is a Reverse Mortgage Right for You?

A reverse mortgage can be an excellent option for those who would like access to funds and want to stay in their home. However, it’s essential to consider the potential drawbacks, such as higher interest rates and reduced equity.

If you’re considering a reverse mortgage here at Hunt For Mortgages, we always suggest you speak with a financial advisor before entering into a reverse mortgage. They would be able to look at your entire retirement plan to ensure you’re making an educated decision that will both benefit you in both the short term and long term.

If you have any questions about whether a reverse mortgage is right for you, contact us, and we’ll be more than happy to get you started in the right direction.