Dernière mise à jour le April 24th, 2023
The reverse mortgage is a product that may not always have the best reputation, but it can be of great interest to some people. However, before deciding to opt for a reverse mortgage, you need to be sure you understand what it entails. This article will describe the pros and cons of the reverse mortgage, as well as alternatives that could be even more interesting.
Who is the reverse mortgage for?
Obviously, this type of product is not for everyone. Here is what the typical reverse mortgage customer looks like.
- 55 years and over
- Has lived in their house for several years and would like to continue living there
- Does not want to increase their monthly payments
- Needs money to:
- pay off a debt
- enjoy life
How does it work?
You can get up to 55% of your property’s value. The bank will base its decision on the following factors and determine the amount it will finance:
- The value of the house
- The city where the property is located
- The type of property (condo, cottage, bungalow …)
- The owner’s age
You will have the option of receiving a monthly pension. For example, $1,000 per month could be deposited into your account until the maximum balance is reached. You can also choose to take the full amount upfront. You even have the option of taking a portion of the available money and keeping the rest for later as needed.
The reverse mortgage: what are the advantages
The main advantage is the absence of payments
In fact, with the reverse mortgage, you will never again have to make a mortgage payment for the rest of your life. However, you will have to assume school taxes, municipal taxes and insurance. You will also be responsible for the upkeep of your home. You do not have to make payments however you can make payments should you wish to do so. You can also reimburse the interest monthly and you can repay up to 10% of the principal borrowed each year.
The bank will not seize your property
If you do not have any payments to make, you cannot default. So, as long as at least one of the two co-owners is alive, the bank cannot foreclose on your house.The amount to be reimbursed will never exceed the value of your home.You or your inheritance are therefore protected and will never have to pay a balance that exceeds the value of your home. However, if the mortgage balance to be reimbursed is equal to or greater than the value of the house, you will not get any money from the sale of your house. Here is an example with numbers to make it easier to understand:
Example 1: The mortgage balance is less than the value of the house
Home Value: $300,000
Mortgage balance to be repaid: $150,000
$300,000 – $150,000 = $150,000
You have $150,000 left after the house is sold.
Example 2: The mortgage balance is greater than the value of the house
Home Value: $300,000
Mortgage balance to be repaid: $350,000
$350,000- $200,000 = – $50,000
You or your inheritance do NOT need to reimburse the $50,000, but no amount is left from the sale of the house. The bank will suffer a loss.
The money obtained is not taxable
In fact, it is a loan on an asset that belongs to you. Therefore it is not additional income and you are not taxed on this money. It also does not reduce your guaranteed income or your pension.
You do not have to show your ability to reimburse
Unlike traditional mortgages where you always have to validate the borrower’s income, with the reverse mortgage, if your credit is remotely good, you won’t have to prove your income at all. However, if you have a bad credit history, the bank will want to make sure that you will be able to afford at least both municipal and school taxes, and insurance. Besides, even with a consumer proposal, if you still have a balance to repay it is possible to finance you. However, the remaining balance to be paid during the proposal must be reimbursed in full.
The reverse mortgage: what are the disadvantages
The interest rate is relatively high
The interest rate on a reverse mortgage is higher than on a traditional mortgage. At the time I wrote this article, there was about a 3% difference in the interest rate available at a traditional bank when compared to the rate on a reverse mortgage.
Since you do not have any payments, interest accumulates every month. You end up paying interest on the interest.To protect yourself from compound interest, you might decide to pay off interest at least every month.
The appraisal of the market value of the property is at the expense of the client. We are looking at a fee of about $400. The notary fees are also the responsibility of the client.
Alternatives to the reverse mortgage
If you have some income and you do not mind making monthly payments there is always the alternative of refinancing. For traditional refinancing to work, you will have to make monthly payments and have sufficient income. However, the interest rate will be smaller.
If you do not have a lot of income, there is always the equity loan option that might work. With an equity loan, the bank relies more on the value of the house to determine how much you can borrow. However, we must also take into account your income so there is a minimum.
To keep your payments to a minimum, the best options are 30-year amortization or a line of credit. With a line of credit, the minimum monthly payment is the cost of interest. By paying only the interest, you will never pay off your loan, but at least you will not pay interest on the interest.
In the end, before deciding on a reverse mortgage, I strongly recommend that you consult a mortgage broker. The broker can explain how the reverse mortgage works, as well as offer you the product. In addition, they will be able to verify with you that it is indeed the product that is best for you and your current situation. I invite you to contact me should you have any questions!
Bruno Gagnon St-Aubin, mortgage broker, Mortgage Planners