Many people who have watched evening or late night television have probably seen the adverts about reverse mortgages. A reverse mortgage is a method for homeowners to unlock a portion of their home's equity as usable cash, while maintaining full ownership of the home. This money can be received as a lump sum, scheduled payments or a combination.
Reverse mortgages are a type of life-term loan, meaning that you don’t have to pay back your reverse mortgage until you sell your home, or you or your surviving spouse passes away. This gives you more options financially if you need a little extra funds for renovations or lifestyle. You get to stay in your home, but spend some of the money that has built up in equity on the home while your house continues to appreciate in value (hopefully offsetting interest costs and reduction in equity).
However, is a reverse mortgage the right decision for your financial plans? Ultimately, this is something you should discuss with your financial advisor, but it’s always good to know the pros and cons of an option to help you make a decision.
If you choose to get a reverse mortgage the money you receive is tax-free, therefore it will not affect any income-based benefits such as OAS or GIS. As well, reverse mortgages do not have to be paid back until you sell your home, or you or your surviving partner passes away.
The amount you owe can never exceed the value of your property, meaning you can’t overdraw your home's equity. As well, the loan can be repaid at any time; although it's always prudent to check when accepting any loan if there is an early pay-back fine.
You and your beneficiaries are not responsible for any shortfall should interest rates increase over time and the value of your home falls.
Payments made to you can be customized in most cases, between lump sum and regular payments, or a mix of either.
Any interest paid on a reverse mortgage is tax deductible if you use the cash to bolster your investment income and boost your interest or dividends.
Interest can accumulate rapidly on reverse mortgage borrowed sums. This can result in offsetting the benefits of your home appreciating in value.
If you are using your reverse mortgage principal to boost your investments, then you need to understand that this is a financially risky move, and may not result in a boost in your savings.
Reverse mortgages have many fees. There are start-up fees, and higher rates of interest on reverse mortgages, making it more costly than conventional mortgages and lines of credit. Other costs include application fees, home appraisal fees and independent legal or financial advice.
Reverse mortgages vary dramatically across the country, so it may not be as viable of an option based on geographic location, age and amount of current debt.
Make Informed Decisions
Reverse mortgages can be beneficial for some, but you should talk with your financial advisor to see if it's the right decision and fits in with your long-term financial plan.