The Pros and Cons of Reverse Mortgages
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Today, Canadian retirees need to adjust their retirement plans to account for the changing retirement landscape. For starters, retirement is lasting a whole lot longer. With life expectancy now almost 83, and many people living well into their 90s, retirement savings have to potentially last 30 years.
In addition to increased life expectancy, government and company pensions are being reduced or even phased out. This double-whammy of reduced pension income and increased retirement years is putting a financial strain on many Canadians.
Many people are reluctant to draw on investments early because of tax penalties and decreased earnings. Others find that borrowing options, like second mortgages, Home Equity Lines of Credit (HELOCs) or alternative lenders, are either too expensive or greatly reduce their disposable income.
A reverse mortgage is becoming an increasingly popular option for many Canadians aged 55 or over. Here, we’ll take a look at the pros, cons and common misconceptions of reverse mortgages to help you see if this financial solution is right for you.
Pros of reverse mortgages:
- You could access up to 55% of the equity from your home, tax-free, without having to make monthly mortgage payments, with no negative cash flow impact.
- It allows you to leverage your most valuable asset.
- You are able to stay in the home you love for as long as you like, plus you get to benefit from any future home price appreciation.
- There is no restriction on how you spend the money you receive.
- You can avoid pulling money out of your registered savings accounts or cashing in investments that haven’t matured, which could help you save on your taxes.
- You can release more equity in the future if you choose not to take the full amount or if your home’s value rises.
- You can choose to receive a cash lump sum, a series of advances, or both.
- Saving more – almost all HomeEquity Bank customers have money left over when their loan is repaid.
Cons and common misconceptions of reverse mortgages:
- The fees and interest rates are typically higher than with a traditional mortgage or HELOC. However, the interest rate for a reverse mortgage is not usually as high as an unsecured line of credit, personal loan, a second mortgage or credit card. To find out what our current rates are, click here.
- It’s too good to be true. Actually, it isn’t: although you make no regular mortgage payments, you only have to pay back the amount that you borrowed, plus interest, when you decide to leave or sell your home.
- The balance of the loan increases over time. This is true unless you choose to make interest payments, in which case the principal borrowed is the amount owed when you decide to leave or sell.
- If you choose to repay the mortgage in the first five years, you’ll have to pay an early repayment charge.
- You may not be able to borrow more money against your home in the future.
- Is downsizing a better option? While downsizing might work for some, it can cost tens of thousands of dollars in realtor’s fees, land transfer tax and legal fees. It also means you have to move out of your home and often your city to make it financially viable. The emotional and financial costs often make this option less appealing.
Who is a reverse mortgage for?
Retirees who need extra income
Reverse mortgages are well-suited to people in need of extra cash or those looking to consolidate debt and/or reduce their monthly payments.
House-rich, cash-poor Canadians
This is a great way to use their home equity to boost their retirement income.
Retirees who are determined to stay in their home
A reverse mortgage can be a powerful financial tool. In fact, 93% of Canadians want to age at home so this is a great financial solution to help them keep their independence and stay in the home they love. Reverse mortgages are designed to help Canadians, like you, stay in their home for life.
Financially savvy Canadians
Those who are looking to leverage their home equity as part of their comprehensive retirement planning and financial strategy.
Getting the money you need
One pro that we forgot to mention is that the application process is simple and straightforward. Just call us at 1-866-522-2447. We will ask you a few questions and begin the process for you to help you access up to 55% of the value of your home in tax-free cash and help you live retirement your way. Still not sure? Find out which reverse mortgage product suits your need.