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Reverse mortgages

A reverse mortgage is a loan secured by your home. Reverse mortgages differ from regular mortgages or lines of credit. Normally, they are not repaid until the property is sold, or the owner moves or dies.

A reverse mortgage lets you use the value of your home to secure a cash flow. The amount of the loan will vary according to your age and the value and location of your home. Normally, the amount of the loan increases with your age and the value of your home. Since it is a loan, you will have to pay interest, and the loan itself will have to be repaid no later than the death of the surviving spouse. The loan will also reach maturity if you move or sell your home. 

Jacqueline and Peter have been living in the same home for over 50 years. They have no intention of selling. Their home’s value has increased considerably over the past few years.

After a few years of retirement, Jacqueline and Peter would like to finance new projects, but their current budget won’t allow it. They’re considering using a reverse mortgage as a source of income.

You can consider a reverse mortgage if you are 55 or over and own your home. A reverse mortgage will let you convert a part of the value of your home into cash. You can borrow up to 55% of the value of your home. You can use this money after repaying any loans secured by your home, like the balance of your mortgage.

Advantages

  • You remain the owner of your home. The lender cannot force you to sell or move to repay the loan. You must, however, continue to pay property tax, maintenance costs, and insurance.
  • You can use the borrowed amount to support your lifestyle, increase your retirement income, invest, purchase an annuity, avoid having to sell property or investments during difficult times, or for other reasons.
  • No repayment is required for as long as you live in your home. You can, however, repay some or all of the interest every year in order to lower the debt load on your heirs.
  • You will not pay taxes on the amount you receive
  • The repayment amount will never exceed the value of your home, thereby protecting your heirs.

Disadvantages

  • No payments are required before the maturity date. The debt incurred through a reverse mortgage can therefore increase rapidly if you do not make annual interest payments.
  • A reverse mortgage is not ideal if you wish to leave an inheritance. The debt could increase to the point of being very close to the value of your home. A significant portion of the proceeds from the sale of your home could therefore be required to repay the loan, decreasing the amount of capital left to your heirs.

     
     
  • A penalty may apply if you repay the full amount before the end of a minimum time period. This penalty is lower if the surviving spouse leaves the home to live in a retirement or long-term care facility. There is no penalty when the surviving spouse dies.
Jacqueline and Peter were planning on using their home to leave their daughter a substantial inheritance, and they don’t want debt repayment to significantly decrease the value of that inheritance. They’ve decided to take some time and consider other options for financing their projects.

Take the time to weigh the advantages and disadvantages of a reverse mortgage for you and your heirs. Are you absolutely intent on holding onto your home? Are any other options available to you? Perhaps your financial institution can provide a mortgage line of credit at a lower cost and with more suitable terms of payment.