For many Canadians over 55, a reverse mortgage is one way to quickly raise cash without worrying about repayment schedules–until you sell your home, or it becomes part of your estate.
There are pros and cons to a reverse mortgage. If you need extra money to fund a special project or holiday in your retirement, and you have no children, it can provide a way to use the equity in your home to achieve your goals–no matter what your income is.
A reverse mortgage can be a good idea for the following reasons:
- The money you get from a reverse mortgage is tax free.
- You can repay the loan when you want.
- You can receive a lump sum or monthly payments.
- You maintain your home to benefit from any further appreciation in its value.
However, reverse mortgages come with some disadvantages that can impact you and your beneficiaries:
- Reverse mortgages cost more than regular mortgages and interest can accumulate rapidly.
- There are only two reverse mortgage lenders in Canada–Canadian Home Income Plan and Seniors Money Canada–limiting the flexibility and choice you have for these products.
- Watch out for high administrative, start-up fees, and penalties for repaying early.
- Not every home is created equal and the amount you can borrow is determined by your location, the age and state of your home, and your existing debt. For some, these conditions may disqualify you for a reverse mortgage.
- When you liquify a portion of the equity in your home, it reduces the value of the estate you pass onto your beneficiaries. For some, this might not be a consideration, but we urge you to discuss this financial step with your family. When you pass away, the amount you borrowed, plus interest, must be paid by your estate within a certain time to avoid penalties.
For personal advice on whether a reverse mortgage is the right step for you, contact your financial advisor.