Reverse Mortgage – the pros and cons
You may be seeing and hearing a lot more regarding the Reverse Mortgage in today’s marketplace. I have taken the time to get familiar with the program here in Canada and have been quite surprised by how it’s changed and how different it is to its counterpart in the U.S. and how relevant it has become given our aging population in Canada.
Who are they best suited for? People age 55+ that own a house, townhouse, or condo and want to either increase their cash flow, or access equity without making a monthly payment. The older the client, the higher the approved limit.
Here is a list of PROS and CONS of the Reverse Mortgage.
- Funds can be advanced as needed such as a line of credit with interest only accruing on the money advanced.
- No income debt servicing like other ‘standard’ mortgages. Retirees with fixed incomes can qualify for much more money as our approvals are based on age and property.
- No payments required. Borrower can retain more of their income and never worry about default or foreclosure.
- Changes in interest rates don’t affect the client’s monthly cash flow since there no payment required.
- Clients can pay up to 10% towards the loan if they choose each year, but there is no obligation.
- Prepayment penalties are waived upon death and reduced by 50% if the borrower(s) are moving into a care home.
- Borrowers will never owe more than the fair market value of the home at the time it is sold
- There are no changes to the mortgage amount and no payments required if one spouse passes or moves into a care home.
- With conservative house appreciation of just 2.5% to 3% per year over time will typically make up for the accruing interest on the reverse mortgage leaving clients with plenty of equity in the end.
- Client are choosing to have more income/cash flow TODAY, in return for having less savings in the home TOMORROW.
- All clients are required to obtain independent legal advice, which is a good thing. But there is a small extra cost. Total one-time set up and legal fees run approximately $2,500.
- Rates are approximately 1.5% to 2% higher than a best rate secured line of credit.
- If the housing market never goes up, and the client lives in the home long enough, there is a chance the client could exhaust all the equity in the home to fund their retirement.
If you, a family member, or a contact of yours could benefit from a reverse mortgage or want to learn more, please contact a Dominion Lending Centres mortgage professional who can walk you through the entire process.
-by Michael Hallett