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How Does a Reverse Mortgage Work?

How Does a Reverse Mortgage Work?
How does a reverse mortgage work?

Ah, retirement! Time for travel, family, and just general ease of living on your own terms! Sounds wonderful, but… what happened? You did plan for your retirement — but, as we all know, life doesn’t always conform to our plans. You may have been hit with illness or a family member may need help, or there may be other unexpected events. Wouldn’t it be nice if you could access the equity in your home to pay for these unplanned expenses? A reverse mortgage allows you to do just that, so you can get back to enjoying your retirement without worry. 

What is a reverse mortgage?

A reverse mortgage, sometimes called “equity release,” allows you to convert part of the equity in your home — up to 55% — without having to sell or move. Repayment is flexible: you can make interest-only payments, a mix of interest and principal or you can even skip the monthly payments, opting instead to pay back the loan when you move, sell, or pass away. In exchange for this flexibility, you continue to pay your property taxes, home insurance, and keep your property well maintained, thereby ensuring your property value is preserved and/or with a potential rise in market values, even increased. You can access the money as a lump sum or on a payment schedule — and it is tax-free, not affecting your OAS (Old Age Security), CPP (Canada Pension Plan), or GIS (Guaranteed Income Supplement) benefits. You can use this money for whatever you want.

Reverse Mortgage Eligibility

Conventional mortgages rely on a monthly repayment schedule to reduce the loan-to-value (LTV) ratio and therefore the risk to the lender. In the case of a reverse mortgage, because no monthly repayment is required, lenders rely heavily on the equity in the home as security, along with a few other criteria to reduce their risk. Unlike traditional lenders (banks & credit unions) who qualify you based on your income, it’s your equity, not your income that reverse mortgage lenders consider when qualifying you.  Plus, if you’re one of those folks who has a lower credit score or has had a previous bankruptcy or consumer proposal, not to worry, once again it’s equity, not credit score that rules the day!

To qualify:

  • All the individuals listed on the title —you and your spouse, for example — must be at least 55 years old. The older you are, the more money you can borrow.
  • You must own your home and live in it as your principal residence (a minimum of 6 months annually). This is the property against which the loan will be secured since all proceeds from the sale of your house can go towards the debt (and not the government in the form of taxes). Your home can be detached, semi-detached, a condo, or a townhouse, but the lender will take into consideration its type, location, condition, and appraised value.
  • Other loans tied to the equity in your home, such as a second mortgage or a HELOC, must be paid off or less than the funds available from the reverse mortgage. 

How to Repay a Reverse Mortgage

As we’ve mentioned (a few times!), you don’t need to make any scheduled payments on your loan. You can pay off the principal and interest at any time, though there may be a fee if you pay it off early. Otherwise, full repayment isn’t required when the mortgage is in good standing, unless you move, sell, or if / when all the borrowers have passed away as the estate is required to sell the property and pay off the balance of the loan in full. The time given to repay the loan depends on the situation and can vary from the closing date of the sale of your home up to 180 days from the passing or relocation into long-term care of all the borrowers. Of course, if your unique circumstance requires longer, the reverse mortgage lender will work with you or your estate to do so.  

While each lender has their own definition of defaulting, it is generally considered to be defaulting on your reverse mortgage if you:

  • Use the money from the reverse mortgage for anything illegal.
  • Were dishonest in the application.
  • Let your home fall into disrepair resulting in lowering its value.
  • Fail to keep in good standing the required home insurance

Pros and Cons of a Reverse Mortgage

When the housing market is booming and home prices are continually increasing, reverse mortgages are a great option for seniors to unlock the equity in their homes, which rises as the value increases in the market. In a stagnant or falling housing market, seniors will be limited to the initial loan. The equity in their home drops and won’t be there as a safeguard if they need to move at any point.

Advantages of a Reverse Mortgage

To summarize, the advantages of a reverse mortgage are:

  • No payments are required until you move or sell (or die)
  • The money is tax-free.
  • Allows you to stay in your home.
  • Flexible options for receiving the funds and for repayment.
  • Does not affect OAS (Old Age Security), CPP (Canada Pension Plan), or GIS (Guaranteed Income Supplement) benefits.

Disadvantages of Reverse Mortgages

Thus far, we haven’t mentioned many disadvantages of reverse mortgages. However, there are a few:

  • Higher interest rates than conventional mortgages. But usually less than for a second mortgage
  • The interest accrued will reduce your home equity. This will especially hurt if the value of your house doesn’t increase, perhaps because of a downturn in the housing market.
  • There will be fees if you pay off the reverse mortgage early, not unlike a conventional mortgage.
  • You may need to borrow a minimum amount in some cases.

Five Steps to Getting a Reverse Mortgage at Auxilium Mortgage

Getting a reverse mortgage is easy if you meet the criteria.

  • When you contact a specialist at Auxilium Mortgage we will first talk with you about your situation. With that knowledge, we can advise you on all your options and discuss what will work best for you. Every person and situation is unique. We have access to a multitude of lenders and products, and we will compare and contrast them to find the right one for you.
  • If you decide that a reverse mortgage is right for you, we help you fill out the application, including arranging an independent appraisal of your home.
  • Appraisal in hand, Auxilium will confirm the amounts you qualify for and will answer any questions about the lender’s terms and conditions or anything else.
  • Everything is then forwarded to the lender who will prepare the legal documents. Your solicitor will then review the documents and answer any further questions you may have.
  • Then the money is yours!

Does a reverse mortgage sound like it might be a good solution for you? Give us a call and we’ll talk about it.

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