A reverse mortgage is also known as a lifetime mortgage and is available to those individuals that are 60 years or older. One of the most intriguing aspects of a reverse mortgage is the fact that there are no payments to be made while the property is still occupied by the homeowner(s).
At first glance this seems almost too good to be true – obtaining a large sum of tax-free money without having to pay it off!?! Sign me up!
Of course, when something seems too good to be true – it typically is. The debt accrued on your property after signing a reverse mortgage is typically due once the homeowner moves (either to a new property or retirement home) or passes away. As well, a reverse mortgage has the possibility of back-firing and working against you.
It is almost too easy to use up the entire equity in your home, which combined with high interest rates of the reverse mortgage, can leave a person in a dire financial strain.
The Canadian Home Income Plan (CHIP) is the only Canadian company that offers a reverse mortgage at present time, and even individuals selling reverse mortgages say that within 7 to 8 years the debt obtained from entering into a lifetime mortgage will double. That means borrowing $50,000 from a house and continuing to live there for 14 years will increase one’s debt to $200,000 (of course, depending on the interest rate) – essentially the value of a typical home.
Many experts agree that a reverse mortgage should be the last thing one should consider when looking at refinancing to have a little extra cash in their senior years, especially if one is considering leaving property to their children. Currently, interest rates range anywhere from 6.75% for a variable rate and up to 8.25% for a 5-year fixed term. CHIP offers a reverse mortgage calculator to let you know how much money you are eligible for (considering you are over 60 and fall within their servicing area): Click here for that calculator.
For example, a couple who are both 60 years old living in Toronto who have no debts left on their home (with an estimated market value of ~$400,000) are eligible to receive almost $100,000. That sounds nice, but if you also use the net equity calculator, you find that your equity significantly decreases after 20 years – dropping from an estimated $600,000 (with a 2% appreciation rate annually) to just over $250,000.
In conclusion, reverse mortgages are good for some individuals, but can be detrimental for others. It is important to look into a variety of loan possibilities before settling on a reverse mortgage.