Retirement is supposed to be the golden years of one’s life. After working for decades in jobs and passions, enough money should hopefully be saved away so you can stop working, secure in the knowledge that you have enough money to live on for the rest of your life.
Unfortunately, as time goes on, the number of people who have enough saved up is dropping. More than 60% of Canadians are concerned they’ll outlive their retirement savings.
With the environment the way it is, it makes sense that people would look to find more funds. And that’s where a reverse mortgage comes in. While somewhat controversial, it offers a chance for home-owners to get the cash they need to live a healthy, wealthy retirement.
What is a reverse mortgage?
Reverse mortgages aren’t too complicated to understand. Basically, if you’re a senior homeowner aged 55 or up, you can borrow up to 55% of the value of your home. It’s secured by the equity in your house and differs from a home equity line of credit insofar as you don’t need to provide any kind of income proof. Since they’re secured using your home, they’re considered to be a part of the mortgage umbrella, rather than as a line of credit, which explains its name.
If you take out a reverse mortgage, you can use the money however you want, whether you’re buying video games, repairing your home or taking fancy vacations around the world. The best part is that you are not expected to pay back the loan or interest until you either sell off your home or pass away. Of course, while this is good for the short-term, it does mean that your family and loved ones will have to rely on the value of your house to pay off the interest and loan you took out. As a result, your home will no longer be part of your will or your family after you leave the mortal plane.
More on Paying Off a Reverse Mortgage
While the main appeal for retirement-aged folks is that it doesn’t need to be paid till some indeterminate time in the future, a reverse mortgage is still a loan.
As a result, while you don’t technically have to pay it until you die or your home is sold, if you decide not to pay it off till the last second interest can accumulate quickly, leaving your family with a much larger fee to pay off.
As a result of this increase in payment owed, you can expect the equity of your home to be impacted, leaving future sellers with much less profit than they may otherwise be expecting.
One of the biggest advantages of this type of loan is that, unlike a traditional mortgage, there is no payment schedule and you are not expected to make regular contributions. Even better, you don’t have to prove your income in order to qualify and, regardless of whether you’re still working or how much you’re making, you’ll be able to access funds that could be critical to your retirement.
Another pro is that the money you borrow is all tax-free, meaning any old age security or guaranteed income supplements won’t be affected and you won’t have to pay the government a cent of the money you’re receiving.
There’s also flexibility in how you get paid. Like winning the lottery you can choose between a lump sum or a regular payment based on whatever works best for your needs. It’s even possible to take it as a combination of the two, allowing for true control of your finances.
Unlike other loans towards projects or goals, you have no requirement to spend your money on certain things. You can buy whatever you want, it’s completely up to you. And you don’t lose ownership of your property until after you already sell the house or pass away.
A reverse mortgage isn’t perfect. There are downsides, the biggest of which is increasing the debt you have, resulting in less to give to your family or leave in your will. Interest rates are also higher than typical mortgage rates, adding to your debt burden. Plus the more you borrow, the faster interest will build up. While it works for helping you retire in comfort, remember that it will impact the loved ones in your life, with expectations of repayment and reduced savings left over.
So you’ve decided that you want a reverse mortgage. First, check that you are actually eligible to take out this loan. In order to apply, you have to own your home – which also has to be your primary residence – and be at least 55 years old. If you have a spouse they also have to be at least 55 years old. You and/or your spouse must be on the mortgage application and you must be able to pay off your mortgage once you receive the reverse mortgage.
Factors like where you live, the market value of your house, its condition and the type of home you live in will all factor into how much money you can receive. You may also be required to speak to a lawyer in order to prove that you know what exactly a reverse mortgage is.
The Last Word
A reverse mortgage is for many people the perfect option to help support them through retirement. It’s easy to access, flexible and provides funding for a comfortable lifestyle with no real expectation of repayment until you’ve already passed the point where it would bother you.
However, the biggest disadvantage is the burden you’ll be leaving your family and loved ones, with a debt that they must shoulder, cutting into any inheritances or amounts left for them. If that’s not a major issue then all you have to do is check your eligibility and get approved.