Cash-strapped retirees may prefer a reverse mortgage even though it comes at a steep cost.
The popularity of Reverse mortgages is on a spurt of growth in Canada.
HomeEquity Bank’s CHIP Reverse Mortgage reports that enquiries about reverse mortgage have more than doubled from 2016 to 2017.
Equitable Bank recently became the second company to offer reverse mortgages in Canada to retiring baby boomers who are house-rich and cash-poor. PATH Home Plan, its reverse mortgage product is available in Alberta, British Columbia and Ontario through mortgage brokers.
A reverse mortgage allows a person to receive payments and draw down on their home equity. The amount received can be in lump sum or regular cash payouts. They stay in their home and keep getting these payments. Reverse mortgage seems to be a workable option in Canada where more than one-third of people approaching retirement have zero retirement savings.
Reverse mortgages can be expensive with the current interest rate on the fixed rate loan for five years is 6.49% which is more than twice the regular mortgage interest rate. A reverse mortgage also leaves a lesser inheritance for your survivors.
It has its supporters who agree that reverse mortgage makes perfect sense for someone who has no cash to survive after retirement.
Know More About Reverse Mortgages
Canadians above the age of 55 and older who own their house are eligible for Reverse mortgages.
HomeEquity Bank has capped the loan amount to 55% of the house value while the rate for Equitable Bank is 40%.
Factors affecting its approval include the applicant’s age, the appraised value of the home, equity stake, the location of the house, prevailing interest rates and much more. Age of the spouse also needs to be at least 55 to get a reverse mortgage.
In a reverse mortgage, the interest on loan is deducted from the home equity. Interest is charged till full loan amount is repaid. It is extendable after completion of the original term as well.
On sale of the house, once the lender receives the money owed on the reverse mortgage, you are then entitled to claim the balance. In case of death, the lender gets their share from the estate and the balance can be claimed by the descendants.
Pros of Reverse Mortgages
While the reverse mortgage amount remains the same, the value of the house keeps going up.
As per market conditions, baby boomers are best placed to make use of reverse mortgages. With home appreciation having a phenomenal growth, they are able to convert their home to cash. In case home prices go down, negative equity can never exist in case of a reverse mortgage.
Sometimes with a reverse mortgage, end of life health care costs cannot be covered even after selling the house.
Cons
Equity compounding can erode the home equity fast. Like you can’t borrow against a property which has a reverse mortgage on it as it increases the reverse mortgage.
Market conditions point towards a housing correction coupled with rising interest rates which doesn’t look conducive for a reverse mortgage. With a reverse mortgage, there is lesser inheritance remaining for your survivors.
Make Your Choice
Downsizing is recommended for retirees as a solution for having more cash in their hands. Reverse mortgages are not considered to be a reliable way of improving long-term retirement income. Consider that an average HomeEquity Bank client is aged 70 when they take a reverse mortgage usually for 10 years.
Living in your own home is important for 9 out of 10 Canadians aged over 65 as per a recent Ipsos survey. Reverse Mortgage fits in well.
