Pros and cons of reverse mortgages
Free up money from equity that you already have – sounds pretty good, right? And reverse mortgages can be a good thing for some people. But for anyone thinking about going down that road, it’s prudent to take a closer look at their advantages and disadvantages before making any moves.
What’s a reverse mortgage and who’s eligible for one
A reverse mortgage is a type of loan in which homeowners get money from their home equity without having to actually sell the home. Depending on age, location, existing financing and the type of property, you can get from 20 to 55 per cent of your home's value. In Canada, you (and your spouse, if you have one) must be at least 55 to be eligible.
Advantages of a reverse mortgage
- You don't have to make any scheduled loan payments and the money you borrow is a tax-free source of income
- This income doesn’t affect any Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
- You are still the owner of your home
- You decide how to get the funds, i.e., lump sum, scheduled payments
Disadvantages of a reverse mortgage
- The interest rates charged are higher than most other mortgages
- Your home’s equity may go down as your loan’s interest adds up
- When you die, your estate must repay the loan and interest in full within a set time
- The time necessary to settle an estate is often longer than the time allowed to repay the reverse mortgage
- Your estate will likely have less to leave to children or other beneficiaries
- Reverse mortgage fees and costs are also higher than those of regular mortgages. So, unless you’re sure you’re going to stay in your home until you pass away, it can really add up
You can visit the Government of Canada website here to find out more details about qualifying for, accessing and repaying the loan.
Make sure to talk to your lender about fees and repayment schedule. It may be right for you; then again, maybe you’d be better off downsizing to a condo or townhouse or considering a line of credit.