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Wouldn’t it be great if every month, instead of paying the lender for the mortgage on your home, the lender paid you?
Sounds incredible, but it happens.
It’s called a reverse mortgage, and it was created to allow older Canadians to tap into the equity they’ve built up in their homes. The money can be delivered in a lump sum, treated like a line of credit that you can access as needed, or like an annuity (with monthly payments).
The best part of a reverse mortgage is that it doesn’t have to be paid off until you permanently move out of the home.
Advantages of the reverse mortgage
- Borrowers get rid of their monthly mortgage payments
- Qualifying is easier than it is for a regular mortgage. No proof of income is required.
- You won’t need to pay taxes on the money you receive
- There are several ways in which you can receive the money, such as regular monthly payments, a lump sum or a combination of both.
- You can spend the money however you like.
- The funds you borrow won’t impact your Guaranteed Income Supplement or Old-Age Security payments.
- The mortgage doesn’t require payments until you permanently move out of the home.
Yes, there are downsides to reverse mortgages
- You will pay more to borrow the money than you would on a conventional mortgage or refinance. The interest rate depends on the term of the loan, but right now they range from 5.74% for a variable to 6.24% for a five-year reverse mortgage.
- There are upfront fees, such as an appraisal fee and you’ll pay closing costs.
- There is a prepayment penalty if you sell the home within the first three years of the reverse mortgage.
- Your heirs will have a limited amount of time to pay back the principal and interest after you die.
Qualifying for a reverse mortgage
You must be at least 55 years of age and a homeowner. The more equity you have in the home, the larger the loan you’ll be able to get.
The Government of Canada suggests that you look at other options in addition to the reverse mortgage. A home equity line of credit or selling your home and buying a less expensive one may be good alternatives to the pricey reverse mortgage.
Always speak with your financial advisor before making any decisions on how to get your hands on your home’s equity.