One misunderstood mortgage solution that exist in the market is a Reverse Mortgage. Some boldly claim (without deep knowledge in the subject matter), that a reverse mortgage is a scheme to take your home away from you. And if that were true, the government would have stepped in long ago, as the institutions offering reverse mortgages are heavily regulated by government authorities (OSFI). We believe that many people are set to believe this because unlike a typical mortgage, whereby your principal is reduced over time, a reverse mortgage increases in principal (hence in ‘reverse’). Now on the surface, that may not sit well with homeowners but let’s take a deeper look.
Firstly, reverse mortgages are catered for homeowners at the age of 55 and older, who have either paid off their home in full or have a relatively low outstanding mortgage balance relative to the market value of their home.
Now, it’s true that with a reverse mortgage, the balance of the mortgage grows over time, but that’s only because mortgage payments are voluntary by the homeowner (rather than mandatory like traditional mortgages). The bank will not require you to make monthly installments, and whatever interest accrues will just be added to your outstanding mortgage balance. However, if you choose to make monthly installments, the same will not occur. The obvious benefit of not making a payment is that you are effectively increasing your monthly cashflow (tax-free) so that you can finance other aspects of your lifestyle, whatever that might be.
“But I don’t want to lose my equity and reverse mortgages will do that, no?”
In a way yes but let’s take a closer look. If your home is “free and clear” (meaning no mortgages(s) owing), the only way to tap into that equity would be by refinancing your home with a traditional mortgage or by selling your home. Now if you were to refinance your home with a traditional mortgage, you would have used up a portion of your equity too, and are also now required to make regular payments to it. This would affect your monthly cashflow and so, if you are retired on fixed income, you might end up using the very funds you received to help make those payments. On the other hand, if you were to sell your home to maximize your cash out, you would certainly get a lump sum of cash, but of course, you now need somewhere to live. Perhaps you decide to rent, and if that were the case, then once again you’re back to making monthly payments to the landlord, among the other stresses and costs that come with moving. Similarly, if you were on fixed income, you might end up tapping into the proceeds from the sale and overtime, slowly deplete your equity through each mortgage transaction. In either scenario, you are still depleting your equity because you are slowly decreasing the cash that you would receive from the refinance or sale of your home at a later date.
Okay so I get it now, its not a bad option…but will they ever kick me out of my home?
With a reverse mortgage, the bank will NOT take your home from you. A reverse mortgage is paid out when; you decide to sell your home OR if you eventually pass. In fact, a major benefit of a reverse mortgage is that you get to continue to live in your home. For most homeowners, especially those that have lived in their homes for many years, the last thing they want to do is to leave. Homes tend to anchor important memories that have established over time in the hearts of homeowners and their loved ones. To most people, this is a priceless quality that they want to continue to hold on to and cherish.
Like always, we encourage you to give us a call to discuss any questions you may have or to simply learn more about Reverse Mortgages and their benefits – (905) 455-5005