“It might be a useful tool for certain people, but not for others,” says Barbara Knoblach, an Edmonton-based financial planner with Money Coaches Canada.
This is how reverse mortgages work
Reverse mortgages can be found to Canadian homeowners aged 55 and over. Up to 55% of the equity built up in your private home could be released tax-free in the shape of a lump sum or installments, normally at rates of interest which can be 2 to three% higher than a standard mortgage.
Unlike a standard mortgage, the loan and interest are usually not repaid at regular intervals. Rather, this happens when the homeowner moves, sells, or dies. In the event of death, the loan and interest payments go to the homeowner’s estate.
The homeowner retains ownership and can’t be forced to vacate the property. Canada also has consumer protection regulations that prevent the borrower from having to pay back greater than the house is value.
The costs and compromises
Homeowners have some responsibilities throughout the term of the loan. The properties must not fall right into a state of disrepair that reduces their value. You also remain on the hook for property taxes and homeowners insurance.
There are other costs try to be aware of, including attorney, appraisal and shutting fees. There may additionally be early repayment penalties should you pay before the tip of the term.
One of the disadvantages of reverse mortgages is that interest accumulates over years at high rates of interest, and due to this fact there may be rarely, if ever, much equity left when the homeowner dies. “The client this might be a good fit for would be the person who doesn’t care as much about preserving the estate. She may not have children or other people she wants to leave an estate to,” says Knoblach. “They would say, ‘This is my house.'” I’ve been working towards this and wish to remain here. And if at the tip of my life all of the equity is gone, I do not really care. I spent my retirement where I desired to live.’”
When a reverse mortgage is smart
For some cash-strapped homeowners seeking to leverage their home equity, there could also be higher options, Knoblach says. Downsizing to a smaller property is one in all them. And for somebody still earning an income, home equity lines of credit typically offer more flexibility and higher rates of interest. “You should work with a financial planner or someone knowledgeable before committing to a product of this type that you can’t back out of,” she says.
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Knoblach also warns against using funds from a reverse mortgage to finance a way of life that will otherwise be unsustainable.
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Meanwhile, Anthony Quinn, president of the Canadian Association of Retired Persons, says a reverse mortgage could be life-changing. The advocacy group has long supported the CHIP Reverse Mortgage offered by HomeEquity Bank.
“We thoroughly reviewed the product and found it to be a unique answer to our members’ questions,” says Quinn. “We found that it really isn’t for everyone, but for a portion of Canadians who either own their homes outright or have a small remaining mortgage and want to access the value of that home without doing something that would be unthinkable for them, which is moving out of their home.”
Downsizing is usually not a viable option because there isn’t a guarantee that a lower-cost property will probably be available after someone has spent a long time constructing social connections and a support system, Quinn says.
More than a legacy
As for property considerations, Quinn says it’s as much as the homeowners to choose what they need to perform. “In fact, we often hear that they are taking money out to help their adult children now, rather than in the future through their will,” he says. “And they take money for the education of their children and grandchildren.”
Quinn bristles on the “paternalism” and “ageism” that he says often creeps into the discussion of reverse mortgages – views like “We don’t want mom, dad, grandma or grandpa to have access to their money because they might do something frivolous with it.”
Leveraging their home equity could allow homeowners to enhance the accessibility of their homes, which might allow them to remain longer, purchase or maintain a vehicle, or just be pickier on the food market, Quinn says. “Older Canadians did the right thing,” he says. “They were told to invest in their home.”
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