Most Canadians tell themselves that they won’t have to worry about anything once they pay off their mortgage. However, even if you pay everything off, you might find yourself strapped for some cash in retirement. Thankfully, there’s a solution for that.
A reverse mortgage can let you tap your home for cash in your later years. One interesting thing about reverse mortgages is that it allows you to hold on to your home – and all of the memories you created there – for as long as you want. It’s no wonder Canadians have been flocking to reverse mortgages in recent years.
Statistics released by Home Equity Bank show that Canadian homeowners are now carrying more than $5-billion worth of reverse mortgages. That’s the most significant amount of mortgages in the country ever.
If you’re considering a reverse mortgage, it’s essential to understand the ins and outs of the loan. That will allow you to make a smart decision about whether or not a reverse mortgage is right for you.
What Is a Reverse Mortgage?
A reverse mortgage allows homeowners aged 55 years and older to turn their homes into an income stream in retirement. You can do this by taking out a line of credit or a lump sum payment. If you have equity built up drawing money from it to fund your living expenses is entirely tax-free.
Many people wonder what happens to their homes when they pass away. Will the bank come after the house? Unfortunately, the answer is no – that’s a common myth about reverse mortgages.
The bank will not take away your property with a reverse mortgage when you pass on. The loan is designed to be repaid out of your estate. If you don’t have enough money to repay the loan, the balance comes out of your house’s equity.
If there’s no equity available in your home after you die, the bank will lose its investment completely. That means senior homeowners are responsible for any loss.
Is Reverse Mortgage Right For You?
You can easily profit from taking out a reverse mortgage. However, these loans aren’t for everyone; they can become very costly if you’re not careful. Here are the most noticeable pros and cons of reverse mortgages.
Pros of Reverse Mortgage
● Helps You to Become Debt-Free
Reverse mortgages allow you to pay off your traditional mortgage. That means that not only are you debt-free, but you’ll also have money freed up for personal expenses and emergencies.
● Allows You to Live in Your Home
Since a reverse mortgage allows you to hold on to your home, it means you can live in the home for as long as you want. No landlord will ever be able to kick you out, no matter how late the rent is.
● Increases Retirement Income
By using a reverse mortgage to turn your home into an income stream, you can live off of the money as a source of retirement income. In this way, you don’t have to rely on investment income from your RRSP or savings account.
● Provides Access to Cash for Home Repairs/Upgrades
A reverse mortgage allows owners to tap into their home equity for whatever they may need the money for, including repairing or upgrading their home. While a traditional mortgage requires you to save up for a down payment before getting the loan, reverse mortgages allow you to access your equity immediately.
● Tax-Free Money Draws
If you have an existing mortgage, a reverse mortgage can help you get more money out of it sooner rather than later. If the interest on your mortgage is close to the tax-free limit, you can take out a lump sum payment and use that money for living expenses. This way, you’ll get more cash in your pocket come retirement time.
Cons of Reverse Mortgage
Can Affect You Financially in Your Later Years
A reverse mortgage could have an impact on your finances when you’re in retirement. Even if you make regular payments through a lump sum payment plan, this isn’t always enough to cover all of the fees and interest charges associated with a reverse mortgage. As a result, you may find yourself paying off the loan well into your 80s – and this can be a lot of money to lose.
Inflation Could Rise by More Than Your Payments Will
If you choose a reverse mortgage plan that provides monthly payments, consider how inflation will impact those payments over time. For example, inflation could make money go further every year, but your monthly payment may not.
Interest is Expensive on Reverse Mortgages
Reverse mortgages are known for being very expensive in terms of the interest rates they charge. So, if you’re using a reverse mortgage to pay off your existing mortgage, keep in mind that the new one will come with much higher interest charges than what you initially paid.
Closing Thoughts on Reverse Mortgages
A reverse mortgage isn’t for everyone. However, reverse mortgages can be a smart way to pay off traditional mortgages and turn your home equity into an income stream. You just need to fully understand the pros and cons associated with these loans before making a decision on them.
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