Reverse Mortgage
Fast cash and no monthly payments - for the
"home rich but income poor" retiree, the reverse mortgage may be a viable way to
ensure you have adequate income to live the lifestyle you want, or to pay for the upkeep
of your home.
A reverse mortgage is a loan against the
homeowner's accumulated home equity that requires no repayment for as long as the person
or his or her surviving spouse or common-law partner lives in the home. The homeowner
mortgages part of the value of the home, receiving the proceeds as cash or a line of
credit or as an income-producing annuity. But instead of making monthly payments on the
principal and interest owing under the mortgage, the interest is allowed to accumulate.
The borrower continues to own his or her own home
and is fully responsible for property taxes, fire insurance premiums, condominium
maintenance fees, maintenance and repairs of the property. Title to the property remains
in the homeowner's name and the owner retains the right to decide when to move and when to
sell.
The loan plus interest is paid back when the
borrower dies, sells the home, or permanently moves out of the home. Because the borrower
makes no regular payments, the amount owed grows larger over time.
Estate Planning
In the case of a couple, when one spouse dies,
nothing changes. Upon the death of the surviving partner, the home becomes part of the
estate in the usual manner and the estate repays the loan as it would repay any other
outstanding debts. If the senior is a single homeowner, the home becomes part of his or
her estate when he or she passes away and the full amount due on the reverse mortgage is
paid by the estate.
The homeowner may leave the home as a gift to a
beneficiary through a will. However, the beneficiary then becomes responsible for repaying
the full amount due on the reverse mortgage. This amount can be repaid from other funds in
the estate or by a traditional mortgage or other type of loan, or by any other means that
the beneficiary chooses.
The loan amount to be repaid is guaranteed not to
exceed the fair market value of the home at the time it is sold. In the event that the net
proceeds from the sale of the home are not enough to repay the reverse mortgage in full,
the repayment is limited to the amount received from the sale of the home. If the proceeds
from the sale of the home exceed the balance on the loan, the estate retains the excess.
Eligibility Requirements
You must be 60 years of age or over. If you own
your property with a spouse, both of you must be 60 or over.
You can receive up to 40% of the value of your
home. Currently, this can range from a minimum of $20,000 to a maximum of $500,000. The
specific amount is based on your age and that of your spouse, the location and type of
home you have and your home's current appraised value.
The reverse mortgage must be registered as a first
mortgage on title. Any conventional mortgage or other home-secured borrowing, including a
secured line of credit, must either be paid off or moved into second place. The proceeds
from a reverse mortgage can be used to retire these loans.
Interest
Interest is added to the outstanding balance and
is compounded semi-annually. You have the option to pay all or part of the accrued
interest once every calendar year. Fixed interest rates are available for six-month,
one-year, three-year, or five-year terms. The variable rate option has no fixed term and
is based on the current bank prime rate.
Proceeds
The proceeds from a reverse mortgage are a loan
and not taxable income. As a result, the money has no impact on any income-tested
government benefits, such as the Guaranteed Income Supplement, and it will not result in a
higher income tax bill.
Costs
There is no cost for requesting a reverse mortgage
estimate but, if you wish to proceed beyond an estimate, a fee is required to cover the
costs of the appraisal of the home. You will also have legal fees. Before you sign the
final reverse mortgage contract, you are required to obtain independent legal advice.
Finally, there are closing costs, which are deducted from the proceeds at the time of
funding and cover the costs associated with obtaining a mortgage, such as title insurance
and registration on title.
Consider also that reverse mortgages are subject
to higher interest rates than most other types of mortgages. Unlike traditional mortgages,
you do not make any regular or lump-sum payments on a reverse mortgage. Instead, the
interest on your reverse mortgage accumulates and the equity that you have in your home
will decrease with time.
Before You Act
If you need cash and are considering a reverse
mortgage, be sure to check all your options carefully and get professional advice.
Remember the key to making the right decision is always good information.
Compare the current interest rates of a
traditional mortgage versus those of a reverse mortgage. Consider other options, such as:
• More
conventional sources of funds (e.g., a line of credit with the house as security or
renting out part of your home);
• Selling
the home and moving to a smaller home or rental accommodation. If you can free up some
equity by selling your house, you may be able to invest the proceeds, live on the
investment income and still have something to leave your children.
Realistically assess your financial resources, the
ongoing costs of homeownership and your desired lifestyle. Make sure you are not trying to
live beyond your means.
Get Professional Advice
Reverse mortgages are complex and binding
financial instruments. Be sure to talk to your chartered accountant about the impact that
your decisions will have on your retirement income, your lifestyle and your estate
planning wishes.
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