What Is a Reverse Mortgage?

July 7, 2022

What Is a Reverse Mortgage? - Featured Image

If you’ve ever seen a television commercial offering a reverse mortgage to help you pay bills or obtain a lump sum against your home’s equity, you may be wondering what it is and how it works. With so many products available by lenders to help you access your home equity, what makes a reverse mortgage different?

A reverse mortgage is a specialized product available exclusively to those over 55 years of age who intend to remain in their existing home indefinitely, or at least for many more years. This type of mortgage is unlike a traditional mortgage in that there are no monthly payments and no repayment of the funds until you either sell the home or your estate settles your obligations.

With a reverse mortgage, you can take up to 55 percent of your primary home’s equity as either monthly payments or a complete lump sum to help supplement existing income, pay debts, or any other financial need. This is money you don’t need to worry about paying back until you sell the home if you ever do.

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What Are The Risks Of Taking A Reverse Mortgage?

In Canada, there are only two lenders that offer this type of product: Equitable Bank and HomeEquity Bank. Due to this limited competition, coupled with the nature of the loan (lenders not receiving their money back for many years) interest rates on a reverse mortgage are higher than that of conventional home equity products.

However, despite this type of mortgage incurring interest, you’re not obligated to make payments. The interest and principal balance are due at the time of sale or when your estate settles the amount owing.

Depending on the lender and your mortgage terms, there may be no options to repay a reverse mortgage before you sell your home. If this is the case, once you take this type of loan you’re locked in, which could mean anyone intended to inherit your property or the proceeds from its sale may receive much less than expected as the equity is tied to repayment of the mortgage.

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Why Would I Want To Choose A Reverse Mortgage?

Despite the risks, there are many benefits to taking advantage of this type of loan. Primarily, a reverse mortgage helps you remain in your existing home longer if your current income isn’t enough to sustain the expenses. This can be key after retirement when your monthly income is limited.

Your current retirement savings may not be enough to sustain monthly expenses after you stop working. A reverse mortgage can provide additional monthly payments to supplement your income during this time.

If you find at some point you need additional care and don’t want to leave your home, a reverse mortgage can provide you with the funds needed to pay for in-home care or other related expenses.

A reverse mortgage can be a backup plan if you find you don’t qualify for other, more traditional types of home equity loans. In most cases, you’ll be approved for this type of mortgage, even without proof of income documentation. If your home has equity, you can take advantage of a reverse mortgage.

The money you borrow using this product is also tax-free, so you won’t need to worry about additional taxes owing in the coming years.

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What Are The Typical Conditions I Need To Meet To Quality For A Reverse Mortgage?

There are a few key things to keep in mind:

  • You can only take a reverse mortgage against your primary residence. Any secondary homes such as a cabin or vacation property are not eligible for this type of loan.
  • Any other mortgages existing on the home must be paid off at the time the reverse mortgage is applied. Your reverse mortgage lender must be able to register first priority against your property for repayment.
  • Your primary home must be located in an area the bank typically lends on AND is a type of home that fits the requirements.
  • All registered owners of the home (names appearing on the title) must agree to be co-borrowers on the reverse mortgage.
  • Any loans secured against the home must be less than the amount of equity you’re seeking to borrow.

A reverse mortgage can be a great solution to many financial needs. If you’re 55 or older and have equity in your home, you can take advantage of this product and use the money for anything you need. It can supplement your monthly income, pay debts, finance renovations, secure in-home health care, or simply allow you better financial freedom. It’s important to weigh your options carefully to ensure that this type of loan is right for your needs, and for your future.

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Photo credits: depositphotos.com

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About the Author:

At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise.Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land.This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers. It is through our uncompromising commitment to our customers that we proudly deliver the Sterling Advantage – that’s why each and every home we build includes a 10-year home warranty, a completion guarantee and new home warranty excellence rating. Our Advantage is our pledge that, when you build your dream home with Sterling, we will deliver a timely, well-built home you’re sure to enjoy for years to come.

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