04 Jun Reverse mortgages
A reverse mortgage is a type of mortgage loan available in Canada that is designed for homeowners 55 years and older (if you have a spouse, both of you must be at least 55 years old to be eligible). A reverse mortgage is a means for homeowners to access a portion of the stored value of their home to use today, while still retaining ownership of their home. This can be done by converting the equity to cash, which can be received as a lump sum, regular payments or a combination of the two.
Payments to the homeowner will not be considered taxable income. Interest will accrue at a set mortgage interest rate, but will not be required to be paid as long as the homeowner resides in the home. The homeowner retains the right to repay mortgage payments. Provided property taxes are paid, the homeowner will have the right to reside in the home for life.
If not repaid previously, the reverse mortgage will be repaid upon the sale of the property by the homeowner or upon the death of the homeowner. If the property is sold for more than the mortgage balance, the heirs of the homeowner receive the difference. If the home sells for less than the mortgage balance, the heirs owe nothing to the mortgage company.
What are the advantages of having a reverse mortgage? There are several benefits in choosing this type of mortgage, namely the fact that payments are tax-free income, the mortgage does not have to be repaid until you sell your home or your surviving partner pass away, the freedom to eliminate monthly payments can be benefit for stretched budgets and you can repay the loan at any time.
However, there could also be a few disadvantages as interest rates are sometimes a few interest points higher than a normal mortgage. In addition, while your home may continue to appreciate in value and offset some of the interest costs and loss of equity, interest will rapidly accumulate on the amount you borrow.
This mortgage is complex and all costs, advantages, and disadvantages should be carefully analyzed within the context of your overall financial plan.