The PROS and CONS of “A Reverse Mortgage”

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While reverse mortgages are controversial, they are becoming increasingly popular in Canada. It’s a plan that gives older Canadians greater financial security. A reverse mortgage is a type of home loan that allows homeowners to convert a part of the equity in their home into cash. Through this mortgage, the homeowners in Canada can obtain cash, without having to sell their home. However, one can qualify for this loan if they are at least 60 years old and owns their home or condo.

Here are the Benefits of a reverse mortgage in Canada

1.   No monthly payments: A reverse mortgage can provide a regular source of income to the seniors rich in home equity in Canada. Rather than consumer paying the lender, here the lender pays the consumers.
2.   It is easy to qualify: Almost all the senior homeowners in Canada have a considerable amount of equity in their home. Due to this reason, the eligibility criteria don’t include credit scores or income in the qualification process. Homeowners who are at least 60 years old can qualify for this mortgage.
3.   Tax-free income: The seniors are not required to pay any tax on the revenue received on this mortgage. It’s their home, their money, and they have already paid tax on it. Technically, this is not income at all – it is merely changing their non-cash equity into cash.
4.   One cannot be kicked out of his home: The homeowners cannot be evicted from their homes under the terms of a reverse equity mortgage. A homeowner has the legal right to stay in his home until he passes away or until he decides to sell his home and move out.
5.   One can use the money for anything: The money that the homeowners receive from this type of mortgage can be used for any purpose. This means that the homeowners can use this money for paying the maintenance and utility bills or going on a dream vacation.
6.   Allow you to remain in your home: It often happens that the homeowners find it difficult to pay their maintenance and utility bills in Canada. This kind of a mortgage lets them to convert the value of their home into cash – thereby allowing them to stay in their home.
The demand for reverse mortgage in Canada is increasing because of the above mentioned benefits.

The downside of “A Reverse Mortgage”

 You do not need to make any payments, the loan and the interest is applied to the lien against your property and it’s only due when you leave the house, either through a sale or with your death.

Once the house is sold and the debt is paid, there could likely be no additional money left. With the accumulating interest, a $250,000 reverse mortgage could cost you $750,000 after 15 years. While this might work well if you have no one that you want to leave an estate to, there are better options to borrow for the equity in your property.

A Home Equity Line Of Credit (HELOC) would give you a cheaper interest rate and allow you to keep ownership of the remaining value of your house. A HELOC is simply a regular line of credit that secured by your house. You would need to make a regular interest payment, though if you absolutely needed to, you could get around that by borrowing a larger amount than what you need, and using that additional credit to pay the interest.

Think of these two scenarios if you’re contemplating a reverse mortgage. While it sounds good to get your equity paid out and not have to make regular payments, for many it could be the worst financial mistake they make. According to the example above, in order to break even, the property value would have to triple in 15 years.



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About Sky Financial

We incorporated The Mortgage Centre-Sky Financial Corp. in August 1992 in Edmonton Alberta. Furthermore we opened offices in Fort McMurray, Cold Lake, Grande Prairie, Red Deer, Stettler, Saskatoon, Moose Jaw and Prince George BC.

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