Reverse Mortgage
This is a type of home equity loan that do not require monthly payments. As a result there is no income requirements. This is why it is often used by retirees. However, you can make interest payments so that the loan amount outstanding does not increase. The loan is typically paid back when the property is sold.
The rate varies based on age, the length of the term and the lenders. At the time of this writing, the fixed reverse mortgage rate is approximately 1.5% to 2% higher than the equivalent bank fixed mortgage rate. It is best to call to get the best current rate.
The cost structure differs for people who are over 55 and under 55. For individuals over 55, the total fees including legal fee, lender fee and appraisal fee is in the range of $2,500 to $3,100. All these fees are added to the mortgage except for the appraisal fee which has to be paid up front by the borrower.
For individuals under age 55, the lender fee is between 2% and 2.5% of the mortgage amount. On top of this there are legal fees and appraisal fee. Appraisal fee is the only fee you need to pay upfront. All the other fees are usually added to the mortgage.
For people in their retirement age, reverse mortgage is often used for maintaining a certain lifestyle or helping the children. However, it can be used to upsize to another property or buy investment property. For people under 55, it is typically an emergency or business opportunity when they have very low cash flow. But in general, the money can be used for anything.
If you are over 55 at the time of application, there is a “no negative equity guarantee”. That means if the loan is greater than the value of the property, the lender will take the loss but it is very unlikely given the appreciation rate of lower mainland property. Typically the equity will grow faster than your loan even if you do not make any payments.
The amount you can borrow varies with age. If you are under the age of 55, the maximum loan will be 50% of the value of your home.
If you are over 55, the maximum loan amount is about 20% of the value of your home and slowly increase with age to about 50% at age 80.
Money from a reverse mortgage is tax-free.
If you take money out of your RRSP, TFSA or investment account you should consider the tax consequences as well as the lost opportunity costs. For example, taking money out of your RRSP will increase your income and may effect your benefits.
You should contact me. Either give me a call or leave me a note below. There is quite a bit of nuances to reverse mortgages. I will explain them as well as compare your other options such as refinancing through various types of lenders, and a home equity line of credit at a bank to see whether reverse mortgage is the best solution for you.