Reverse mortgages

A reverse mortgage is a loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition based on the value of your home. A key feature of a reverse mortgage is that you can access a certain amount of your home’s equity without having to sell it.

To be eligible for a reverse mortgage, you must be at least 55 years old, and the home must be your primary residence.

You can borrow up to 55% of your home’s current value. The amount you may qualify for will depend on how much your home is worth, your age and the lending financial institution. You must pay off any other loans on your home, including an unpaid mortgage.

5 advantages of a reverse mortgage

1. Receive cash payments. You may choose to receive money in regular instalments or lump sum.
2. Stay in your home. You continue to own your home while accessing some of its equity.
3. Tax-free funds. You do not pay tax on the amount borrowed.
4. No income test. An income is not required to qualify for a reverse mortgage.
5. Deferred repayment. You do not need to make regular repayments. However, the amount must be repaid if the home is sold or if the last borrower dies.

Tip

Make sure your reverse mortgage guarantees that you will never have to pay back more than what your home is worth when you sell it.

5 disadvantages of a reverse mortgage

1. Potential for higher borrowing costs. The interest on reverse mortgages is typically higher compared to other products.
2. Additional costs. There may be additional costs to set up a reverse mortgage such as appraisalAppraisal An evaluation of what your home or other property is worth today. Most often done by someone who is an expert or is certified by an organization or the government. The Appraisal Institute of Canada is one organization that designates individuals.+ read full definition fees, application fees and legal fees.
3. Early payment penalties. You may have to pay fees or financial penalties if you choose to repay the loan early.
4. Reduced inheritanceInheritance Property, money, titles, or debts that pass to you after someone’s death.+ read full definition. If your estateEstate The total sum of money and property you leave behind when you die.+ read full definition must repay the loan, there could be less money for your children and other beneficiaries.
5. Increased debt. Reverse mortgages increase the amount of debt you carry and too much debt may limit your financial options.

Caution

Be aware of the debt you’re building up. You’ll pay interest on the interest. And the loan will have to be repaid if the home is sold.