Many retirees take out a reverse mortgage to boost their retirement income, pay for home renovations, give financial help to family members or to help them pay off debt while staying in their current home. In these situations, the reverse mortgage is a kind of refinance mortgage, as opposed to a purchase mortgage. This means that the loan is given based on the equity in the current home, borrowers get to stay in their home and use the funds for a wide variety of purposes.
However, many Canadians often ask, “Can you use a reverse mortgage to purchase a home?” It often surprises people when they find out that, yes, you can buy a house with a reverse mortgage, by using it as a type of purchase mortgage.
How can you use a reverse mortgage as a purchase mortgage?
There are three ways you could use a reverse mortgage to purchase a new home:
- Buying your first home: for retirees who have significant retirement savings but who don’t own their own place, using a reverse mortgage to purchase a home can be a great financial strategy. For those retirees who have been living in a rental property, the security of owning their own home can be invaluable. Taking out a reverse mortgage would mean that these individuals no longer need to worry about possibly being forced to move out or finding the money to cover high rent increases.
- For example, if you’re looking to buy a home for $300,000 but don’t quite have the entire amount saved, you could look to a reverse mortgage to help pay for the shortfall*. Apart from having the security of owning your own place, you will also have the advantage of not having to make regular mortgage payments. You only have to pay back the money you owe on a reverse mortgage when you decide to sell, so your retirement income won’t be affected when buying a home.
- Downsizing: some retirees find that their home is too big for their current needs and decide to move to a smaller place in the same neighbourhood. A reverse mortgage could help them buy their new place while keeping more of the funds from the sale of their old home, this is money that could be invested to increase their retirement income or used to help pay for other expenses.
- For example, if you were to sell your original, mortgage-free house for $500,000 and buy a condo for $250,000, you could use a reverse mortgage to pay for a part of the cost of the condo*. This would then free up more money from the sale of your home, which could make a big difference to your savings and the level of your retirement income.
- Using a reverse mortgage to buy a second home or vacation property: having a vacation property in retirement is a dream for many Canadians. Being able to spend much of the summer at a cottage, cabin or chalet could become a reality with a reverse mortgage.
- Using a reverse mortgage to buy a second home can be easy: let’s say your current, mortgage-free home is worth $600,000 and you want to buy a small vacation property. You could cover some of the cost of the second home with a reverse mortgage*. You would not only enjoy your vacation home during the rest of your retirement, you would also benefit from any appreciation in its value when you decide to sell it in the future.
How do you qualify for a reverse mortgage?
You need to be a Canadian homeowner and at least 55 years of age. The amount you will receive will depend on your age (and that of your spouse), the location of the home to be mortgaged and its value.
The maximum you will receive is 55% of your home’s value; on average the older you are, the more you will get.
Check out the new purchase mortgage rates for the CHIP Reverse Mortgage® here. Remember though, regardless of the new purchase mortgage rates, with CHIP you don’t have to make any regular mortgage payments.
How do you take out a reverse mortgage as a purchase mortgage?
It’s really simple. All you need to do is:
- Estimate: Find out how much money you can get with a free estimate
- Review: One of our consultants or specialists will contact you to verify your information and answer any questions you may have
- Receive: You decide if you would like to receive the money you need in one lump sum or installments
- Payment: There are no monthly mortgage payments and the full amount becomes due when you are no longer in the home
John and Sally’s story
John and Sally have lived in an affluent Toronto neighbourhood for over 30 years. Their home was getting too big for them to handle, so they were looking to downsize to a smaller home. However, they had a lot of accumulated debt and they still wanted to have some money left over to invest and generate income.
After speaking to their financial advisor, they decided that the CHIP Reverse Mortgage was the best option for them. They sold their $2 million home and paid off all existing debt, including their mortgage. They then invested $500,000, which brought in valuable retirement income. By taking out a reverse mortgage and adding it to some of the proceeds from their house sale, they could afford to stay in their old neighbourhood by buying a smaller property close by.
By using a reverse mortgage to purchase a home, John and Sally are able to spend the rest of their retirement with no mortgage payments, in a smaller and more manageable home.
Violet is a retired writer based in Burnaby, BC. During her working life she travelled a lot and never bought a property. She did, however, save up a lot of money for her retirement and always planned on buying a home of her own. She was tired of the uncertainty of renting and the fact that she saw no return from her monthly rent money.
Violet was able to use a combination of her savings and a reverse mortgage to purchase her new home. By using a reverse mortgage to purchase her home, Violet is no longer paying substantial monthly rent payments and she will also benefit from any increases in her home’s value when she comes to sell it.
Peter is a retired widower living in his $600,000 family home in Sherbrooke, Quebec. Peter always wanted to have a vacation home as he loves the outdoors, but never had the necessary funds to buy one.
By using some of his retirement savings, along with a reverse mortgage taken out on his family home, Peter was able to buy a beautiful lakeside vacation property only three hours’ drive away. He can now enjoy every summer at his vacation home without having any negative impact on his retirement income.
How to apply for a reverse mortgage to purchase a home
Just call us at 1-866-522-2447 or use this contact form. You could be on your way to using a reverse mortgage to purchase your new home. Still not sure? Check out which reverse mortgage product suits your need.