What Is A Reverse Mortgage?

What is a Reverse Mortgage?

Many seniors struggle to find ways to maintain their standard of living in the face of growing inflation because the average safety net for seniors in Canada is only expected to be $5,500 by the year 2022 and may likely go down in 2023.

Some people decide to get a reverse mortgage so they can access some much-needed cash while also maintaining their status as homeowners and increasing their income.

Here is an explanation of how reverse mortgages work and the information homeowners who are thinking about getting one need to know.

What is a Reverse Mortgage?

A reverse mortgage is a loan that permits you to borrow money from the equity in your property (home) without having to sell the property in question.

It is available through regulated lenders such as Equitable Bank and HomeEquity for Canadians.

The reverse mortgage is also known as an “equity release.” With this type of mortgage, you can borrow up to 55% of what your home is worth right now.

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The factors that influence the amount borrowed

The amount of money you can borrow is heavily influenced by the following:

1. Your age: If you are between the ages of 55 and 60, you will likely have fewer borrowing possibilities than older folks.

2. The appraised worth of your home: The value of your home also has an impact on the amount you can borrow.

3. Your lending institution: Again, your loan amount is affected by your lender’s borrowing limit.

When the last person who owes money on the house moves out, sells it, or dies, the debt is paid off. This means you won’t have to pay anything on your reverse mortgage until the loan is paid off.

If you don’t pay on a reverse mortgage for a long time, you will have to pay more interest. At the end of your loan term, you may have less equity in your home.

How A Reverse Mortgage Works

The way reverse mortgages work in Canada is that you will not be eligible for one until you have paid off and closed any existing loans or lines of credit secured by your house. This is true for all Canadian provinces.

A mortgage and a home equity line of credit are examples of HELOC. You can do this with the money from a reverse mortgage.

You can utilize the remaining loan funds for anything you like, such as:

  • pay for property repairs or upgrades.
  • assistance with routine bills.
  • pay for medical expenses.
  • Debt repayment

A reverse mortgage may limit other financing options backed by your house. You may be unable to obtain a HELOC or comparable product.

 Who Maybe Eligible For A Reverse Mortgage In Canada

To be qualified for a reverse mortgage, you must be:

  1. You need to be at least 55 years old and a homeowner to qualify for this program. In order to qualify for a reverse mortgage, you and your spouse must be at least 55 years old if either of your names appears on the property title.
  2. The property must be your main home, which means you have to live there for at least six months a year.
  3. You are required to own your own home. If you have a mortgage balance that is not paid in full, you violate the law.. However, you can pay it off with funds from the reverse mortgage.
  4. You must get independent legal counsel. Because reverse mortgages can be expensive and risky, most lenders require that you talk to a lawyer before making a final decision.
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Minimum credit score requirements

Due to the fact that reverse mortgages in Canada do not require monthly payments, the majority of lenders do not require borrowers to have a minimum credit score.

But some lenders will still want to look at your credit report to make sure you don’t have any other obligations that might make it hard for you to pay your taxes and insurance on time.

If you have missed payments in the past, it could make it less likely that your application to reverse your mortgage will not be accepted.

The cost of a reverse mortgage in Canada

The costs associated with reverse mortgages in Canada include, but are not limited to, the following:

Interest Rate

A reverse mortgage carries a higher rate of interest than a conventional mortgage.

Legal Fees

In most instances, an additional legal fee is levied in addition to the closing charges or for independent legal counsel.

Legal Counseling

 Because reverse mortgages are considered high-risk, some lenders require that you consult with an attorney before applying.

Home Evaluation or Appraisal Fee

Before a reverse mortgage takes place, you will have to evaluate or appraise the property to ascertain its worth. Such an appraisal also attracts a fee known as an appraisal fee.

Setup Cost or Fee

In Canada, most lenders usually impose some additional administrative fees.

Ongoing Fees

Like in the traditional mortgage system, taxes, homeowner’s insurance, the loan’s interest, and any service costs must still be paid.

Prepayment Charge

Because this is a loan, it is possible that your lender will demand that you pay an early repayment penalty if you decide to pay off your reverse mortgage prior to the day on which it is due.

The fees you pay may vary, however, this depends on the lender. There is a possibility that certain costs will be added to the balance of your loan. You can also be required to make upfront payments for other people.

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Where To Get A Reverse Mortgage In Canada

There are two major banking institutions that provide reverse mortgages throughout Canada. They are as follows:

1. Equitable Bank

Equitable Bank offers reverse mortgages in some of Canada’s biggest cities.

2. HomeEquity Bank

It provides the Canadian Home Income Plan (CHIP), available throughout the country. You can get a reverse mortgage from either HomeEquity Bank or a mortgage broker.

Please before you settle for a reverse mortgage, it is essential that you shop around and consider your options. There are other products from your financial institution that may be available to match your needs.

Five (5) Alternatives To Reverse Mortgages

Before making your final choice, you should also compare the costs of these possible alternatives to a reverse mortgage:

1. Loans Of Other Kinds

Consider acquiring a personal loan, a line of credit, or a credit card instead.

2. Sell Your Home

You might want to think about selling your home instead of getting a reverse mortgage.

3. Purchasing A Smaller House

An excellent alternative to a reverse mortgage is to buy a smaller home, like an apartment with one bedroom.

4. Renting

It would be best if you also thought about renting a different house or apartment. This can also be quite delicious and inexpensive.

5. Housing Assistance

Also, consider moving into assisted living or other forms of alternative housing.

You should discuss getting a reverse mortgage with your family and a financial professional before moving forward. You need to know a lot about how a reverse mortgage works and how the loan will affect the value of your home over time.

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How to Apply for a Reverse Mortgage in Canada

The six steps to applying for a reverse mortgage in Canada are as follows.

Step 1: Seek legal counsel

Because reverse mortgages are risky, it is customary to get independent legal advice before applying to a lender. In most cases, you’ll need to seek independent legal counsel.

This is to ensure that you understand the risk involved in reverse mortgages and are not pushed into taking out a reverse mortgage.

Step 2. Compare lenders

After getting legal advice, the next step is to compare different lenders and choose one with terms and conditions you are comfortable with and consider fair enough.

Step 3: Completing and submitting an application

You’ll need to submit an application when you’ve decided on a lender whose terms work well for you.

The application procedure or reverse mortgage may vary based on the lender’s preferences. In all, you can still get started online.

Some lenders facilitate the application process by providing in-person or phone assistance.

Step 4: Have your home inspected

Evaluate your house. This step is important because a home appraisal could stop you from getting a reverse mortgage.

Step 5: Submit any supporting documentation

You will need to submit the following supporting documents:

  • financial statements
  • Additional financial records
  • returns on taxes.
  • Appraisal and inspection reports

Step 6: Complete the loan

This stage differs depending on the lender. You may be required to sign the loan documentation in person or online.

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How to Repay a Reverse Mortgage in Canada

As was previously explained, reverse mortgages operate somewhat differently than conventional loans.

A reverse mortgage is different from a traditional mortgage in that you will not have to make payments.

One advantage of this kind of mortgage is that you always have the option to pay off the loan in full, including the interest and the principal. However, you may incur a cost if you prepay your reverse mortgage.

Here is how you repay a reverse mortgage in Canada.

  • When you sell your home,
  • When you move out of your home,
  • The last borrower dies.

Reverse Mortgage Defaults

Your reverse mortgage could default if you do any of the following:

1. Illicit Transaction

Using reverse mortgage funds for illicit transactions is prohibited. That is, utilizing the funds to purchase drugs, etc.

2. Dishonesty

Also, providing false information on your reverse mortgage application is a violation.

3. Home Damage

It is also against the law to allow your home to deteriorate beyond repair, as this would decrease its value.

4. Flaunting Mortgage Terms

It is also possible to default on the reverse mortgage contract if the terms and conditions are broken or not followed.

Each reverse mortgage lender may define reverse mortgage default differently. Ask your lender what could lead to your loan default.

When you pass away, your estate must return the total sum owed. If numerous people own a home, the loan must be repaid when the last owner dies or sells the property.

The period you or your estate have to repay a reverse mortgage can vary. In the event of your demise, your estate may have up to 180 days to repay the mortgage.

However, if you require long-term care, you may have only one year to repay the debt. Talk to your lender about the schedule for paying back a reverse mortgage.

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How To Compare Reverse Mortgage Lenders

Three indices can be used to compare lenders when applying for any form of loan. They can be compared using the following criteria:

Rates

Because you will be charged interest on any lender payments you get. Therefore, it is essential to evaluate numerous lenders’ interest rates before selecting one. The lower your interest rate, the slower the decline of your equity.

Closing Expenses

Also, it’s important to look at all closing costs and pay close attention to any setup fees, which can be expensive and pop up out of nowhere.

Reviews

This, in my opinion, is the most essential comparison to make. Research the lender and see how current and former customers rate it on Finder and other review sites like the Better Business Bureau and Trustpilot.

The Pros of Reverse Mortgage

Before obtaining a reverse mortgage, you should carefully weigh its advantages and disadvantages.

1. There is no regular payment

In contrast to standard mortgages, reverse mortgages do not require monthly payments.

2. Easily convert assets to cash

You can get some of your home’s value in cash without having to sell it.

3. You don’t pay tax

You do not have to pay taxes on reverse mortgage funds.

4. There is no effect on OAS

This money won’t affect your OAS or GIS.

5. You retain your home

You can continue to own your house while benefiting from a reverse mortgage.

6. Options to receive cash

You may have choices regarding how and when you receive the money.

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Cons of a reverse mortgage

It would be best to examine a reverse mortgage’s advantages and downsides.

1. High rates of interest and expenses

Reverse mortgage rates are typically substantially higher than standard mortgage rates. Other fees, like closing costs, might also add up.

2. Lose equity

As interest accrues, the amount of equity you have in your house reduces, potentially to the point where you have no equity left.

3. The obligation to repay

If you must vacate the property or relocate, or if you default on the loan, you must be prepared to repay the total amount. If you die, your estate is obligated to pay.

4. A familial inheritance

A reverse mortgage might reduce your home’s equity, leaving your family with less money when you pass away.

5. Time-consuming procedure

Should you pass away, the period required to settle your estate could be far longer.

What is a Reverse Mortgage Conclusion

A reverse mortgage is an unusual option for people who have owned their home for at least 55 years and want to cash in on its value without giving up ownership.

To avoid losing all of your home’s equity or depleting the legacy you hope to leave for your family, you need to be aware of the associated risks and costs.

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FAQs about What is a Reverse Mortgage

What is a reverse mortgage?

Simply put, a reverse mortgage is a kind of borrowing money. If you are 55 or older and have built up significant equity in your home, you may qualify to borrow against the value of your home and receive the proceeds in a lump amount, as a fixed monthly payment, or as a line of credit. Reverse mortgage borrowers don't make monthly payments, unlike forward mortgage borrowers. The debt is due upon the borrower's death, permanent relocation, or property sale. Federal rules say that the loan amount can't be more than the value of the property being bought.

How does a reverse mortgage work?

To avoid making monthly mortgage payments and tap into their home's equity tax-free, Canadian homeowners aged 55 and up can safely do so with a reverse mortgage. You can gain access to tax-free funds without downsizing, selling, or moving. HomeEquity Bank's CHIP Reverse Mortgages guarantee that borrowers will never lose the title to their properties. Whatever happens to your income or the value of your property, you will never be forced to sell or relocate.

What is reverse mortgage?

A reverse mortgage is a loan arrangement that allows you to access up to 55 percent of your home's current worth without selling it. This type of mortgage is the polar opposite of a conventional loan. The lender will make payments to you instead of you making monthly installments. The process through which a reverse mortgage frees up property value is commonly known as "equity release." While this may seem like a good idea to some homeowners, remember that your interest payments will increase if you extend the term of your loan.

How do reverse mortgages work?

In Canada, homeowners over the age of 55 may apply for a reverse mortgage, a type of loan that allows them to access their home's equity without selling their property. You can get a loan for up to 55% of the value of your home (depending on a number of circumstances), and you won't have to pay it back until you sell the home or die. Pensions are getting less secure, and more and more seniors don't want to take on new debt, which makes it hard for many seniors to get a reverse mortgage.

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October 14, 2022
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