A Reverse Mortgage is an amazing financial solution that has helped tens of thousands of people over 55 to change their financial lives – but this does not mean that there aren’t pros and cons of a reverse mortgage.
Like any financial decision, there are both advantages and disadvantages that need to be considered.
At Reverse Mortgage Pros – as the reverse mortgage Canada specialists – we believe in objectively showing you both the pros and cons of a reverse mortgage, so you can rest assured that the decision is absolutely the best one for you.
You want to make your reverse mortgage decision while being informed and educated about all the facts.
So in this latest article, we’d like to take a look at both the major pros and the cons of a reverse mortgage in Canada.
PROS OF A REVERSE MORTGAGE:
1. You Own Your Home For Life. Period. No Exceptions.
By far the biggest advantage of a reverse mortgage is that it allows you to get money out of your home with absolutely zero risk that you’ll ever lose ownership of your home.
The reverse mortgage product – unlike what some people believe – is designed to keep you in your home for life.
Unlike a ‘normal’ mortgage, home equity loan or a home equity line of credit – you are guaranteed to keep ownership of your home for life and the lender cannot take it away for any reason whatsoever. This is actually written into the legal agreement in black and white.
This is because no repayments are required – failing to make repayments is the major reason that mortgage or home equity lenders risk losing their home.
2. Freedom And Flexibility
Increasingly in Canada, the majority of savings one has upon retirement
are tied up in property.
A reverse mortgage can be spent on anything you like – you have the complete freedom and flexibility to decide. You’ve worked hard your entire life – now is the time to reap the benefits, live worry-free and free of debts or stress.
You don’t have to make any payments (although you can voluntarily make some if you like!) and there are no rules or requirements on how you spend the money. This is as it should be – you invested into your home over the years and you should now reap the benefits – turning it into a ‘home pension’ by taking out a reverse mortgage is one way to do this.
3. 100% Tax Free
The money from a reverse mortgage – regardless of how you choose to receive it – is tax-free since it is technically a loan and not income.
Unlike pension withdrawals or other forms of retirement funds, a reverse mortgage is not taxed at all. Not one penny.
4. No Re-Payments Required
The whole purpose of a reverse mortgage is financial freedom – not loading you with more debts that you need to worry about paying!
Through conservative lending and not lending over a certain value of your home (55% maximum), it is possible to maintain the equity in your home without requiring you to make any repayments – home valuation growth can offset the loss of equity instead.
5. Safety If The Housing Market Declines
Even if there was a massive housing crash, you will never owe more than what your house is worth at sale – guaranteed. Even when things such as Brexit occur, we are there to help you.
This is written into the reverse mortgage contract. So you are protected against any future potential housing shocks. You don’t need to worry about what’s going to happen with the housing market in Canada.
And, best of all, 99% of reverse mortgages in Canada have equity remaining when the reverse mortgage is removed. The other 1% is capped to what the home is worth – it can never be above this.
So you also don’t need to worry about leaving a bill behind for your family.
CONS OF A REVERSE MORTGAGE:
The amount you receive is still liable to interest. Although you will never have to make any re-payments, this could reduce the equity in your home over time – but only if interest rates are more than double your property value appreciation.
Interest rates are almost always higher than a ‘normal’ mortgage or Home Equity Line Of Credit (HELOC) but lower than a Line Of Credit (unsecured), Car Loan, Loan or Credit Card rate by quite a bit.
The rates are low enough that growth in your home price should offset the interest – or in many cases just now, you can actually still see your home equity grow – even with a reverse mortgage on your home.
However, you need to factor this in and decide if the rate is worth paying for all the features and benefits (listed above).
2. Moving Home Is Harder
The whole purpose of a reverse mortgage is to help you stay in your home.
So if you were thinking about maybe moving to another residence in future, it’s a little more difficult as you’d have to close off the reverse mortgage first.
Of course you can just pay off your reverse mortgage with the proceeds from the sale of your home (as we noted above, you can never owe more than what your home is worth at sale). However, it does add a little more complexity to the decision to move home.
It should be noted that the same applies to any type of mortgage or loan secured on your home. A ‘normal’ mortgage or Home Equity Line Of Credit would have the exact same disadvantage.
3. You Might Not Be Eligible
While you do not need good income or an excellent credit score – which you would need for most mortgage products, there are some restrictions on eligibility for reverse mortgages.
All property owners listed on title must be over 55 and your age(s) will determine how much money you are eligible for – in general, the closer you are to 55 the less you are eligible for.
This is because of how conservative reverse mortgage lending is. If they were not as conservative, people would see their home equity being eaten up – so these rules are put in place to protect you and your home equity.
Furthermore, this product is only available on your primary residence – not any vacation or mobile homes.
4. Reduction Of Your Estate Size For Inheritance
By taking out a reverse mortgage, you are reducing the estate size available to your relatives for inheritance. For this reason, you might consider speaking to any relatives or family members during the process of applying for a reverse mortgage to ensure they are happy with everything.
The other thing to note is that you are only reducing your estate size if you actually use the all the money.
Of course, if you don’t actually use the money then your estate size stays the same – you have just moved some of the value of your estate out of your home and into your bank account – it is still in your estate just in a different format.
The actual impact on your estate size will then depend on how much of the money you use and the growth in your home prices vs the interest rate on the reverse mortgage. Some people (many people in Canada just now) are actually seeing their estate size increasing despite having a reverse mortgage on their property – this is because home price appreciation is offsetting both the interest rate and money being spent.
It would definitely not be prudent to rely on this happening though and factor in a reduction in estate size to your decision.
In Summary – The Pros And Cons Of A Reverse Mortgage
I hope the article above helps you decide if a reverse mortgage is a great fit for you.
Sometimes you will have heard other rumours or ‘facts’ about reverse mortgages in Canada – mainly this is people confusing them with the American version of the product.
The above information represents the real and true pros and cons of a reverse mortgage in Canada. If you have any other questions or concerns then feel free to leave a comment below and we’ll respond in due course.