What Are Reverse Mortgages?

A reverse mortgage is a loan that allows homeowners to get money from their home equity without them having to sell their homes. Typically, the funds borrowed through reverse mortgages are released in either of three ways; either as a lump sum, as a monthly payment, or as a line of credit.

Reverse mortgages also allow you to borrow up to 55% of the value of your home! And once you receive the loan from the lender, it isn’t considered due until you move out, die, or sell the property.

If you would like to learn more about reverse mortgages, read on. This article will reveal to you more about reverse mortgages, including types, pros and cons, and more.

Let’s get to it!

What are the types of Reverse Mortgages available in Canada?

Currently, Canada has two main types of reverse mortgages; Open-ended and Single-purpose mortgages.

Each of these mortgages has specific features that make them distinct from one another.

Let’s have a closer look at each to get a better understanding.

Single Purpose Reverse Mortgage

Just as the name suggests, single-purpose reverse mortgages are loans that are approved and paid to borrowers for a singular purpose like: paying property taxes or house renovation and maintenance.

They are mainly provided for elderly members of the public (55 years or older) and are secured by the borrowers’ homes. 

These loans are primarily the least expensive because they are backed by government agencies and non-profit organizations.

That said, here are some…

Pros of using Single Purpose Reverse Mortgages

Some of the pros of using single purpose reverse mortgage loans include:

• The loans are tax-free
• They are pretty easy to qualify for the average individual
• Monthly payments are not required 
• You enjoy the benefits of a loan without having to sell your home
• You can choose from a variety of options as to how you want to receive your money
• The money doesn’t affect your Old-Age Security (OAS) or your Guaranteed Income Supplement (GIS) benefits

Cons of Using Single Purpose Reverse Mortgages

If you are eligible for this type of loan, some of the cons you can expect while using it include:

• Some fees may apply– As aforementioned, single-purpose reverse mortgages are typically the least costly of reverse mortgage loans. However, they could still be subject to fees such as closing costs. In addition, the lender could also charge interest on the loan

• Lenders restrict the use of these proceeds–The main downside to this kind of reverse mortgage is that you have to use the funds for one purpose, which the lender must approve. As a result, you won’t be able to use the money to cater for your daily expenses, activities like vacations, or medical bills 

They may not be available in every location– In Canada, single-purpose reverse mortgages are provided by Local and State governments, non-profit organizations, and a few credit unions. However, they are not available in many other counties. In addition, many financial institutions do not provide these loans

Open-Ended Reverse Mortgage

Open-ended reverse mortgages are a type of home loan wherein the entire loan amount isn’t given to the borrower all at once. Instead, it is released on a need-basis.  

In contrast to traditional mortgage loans, the loan allows the prospective buyer to purchase a home without using the entire amount that they qualify for. 

And if they complete the main project successfully but still have other needs to cater for, they can continue to draw funds from the loan.

An understanding of open-ended reverse mortgages is crucial to homeowners. Therefore, let us look at the following allegory:

Say you intend to buy a home worth 400,000 CAD. You visit a financial institution that provides such credit facilities—assuming that you qualify for a 600,000 CAD. You could take the 400,000 CAD and buy the house, then later request another 75,000 CAD for another project. 

The open-ended kind of reverse mortgage allows for such an application because your loan repayment will be calculated on the principal you borrowed but not on the total amount you qualify for.

That said, let’s look at…

Pros of Open-ended reverse mortgages

Some of the pros of open ended reverse mortgages include:

• Maximum credit at low interest– An open-end mortgage can offer a borrower a higher amount of funding at a low-interest rate. This is because the creditor can draw on the loan principal to cover any real estate costs that may arise during the loan’s term.
• You don’t have to make any regular loan payments– You can convert some of your home’s value into cash without necessarily selling it. What’s more, you need not pay taxes on the money you borrow
• OAS and GIS security– This money has no bearing on your Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
• You still have ownership of your home– You retain possession of your property throughout the credit facility term despite having your house as security for the loan
• Flexibility and Choice– Open-ended reverse mortgage facilities allow you to choose when and the terms through which you receive the funds

Cons of using open-ended reverse mortgages

• Higher interest rates- Interest rates are greater than those associated with single-purpose reverse mortgages
• Reduction of your property’s value- As interest on your loan accumulates, the equity in your home may decrease. As a result, your estate may have less money to leave to your kids or other beneficiaries as inheritance.
• Timely loan repayment after the death of a borrower- When you die, your property is obligated to pay back the loan and interest within a specified time frame

Conclusion

Generally, the reverse mortgage is the best option for credit facilities that service your home acquisition or renovations, especially for elderly homeowners aged 55 and above.

This type of loan is a good fit for you because it is quite easy to qualify, has little or no interest charged, and allows borrowers to use their homes as security without paying installments. 

If you wish to know more about reverse mortgages consult with me to find the best option for you today.

Are you ready to purchase a home? Reach out to me directly or start your application here: www.sandraforscutt.ca/mortgage-application/