A reverse mortgage is a loan 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
- Receive cash payments. You may choose to receive money in regular instalments or lump sum.
- Stay in your home. You continue to own your home while accessing some of its equity.
- Tax-free funds. You do not pay tax on the amount borrowed.
- No income test. An income is not required to qualify for a reverse mortgage.
- 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.
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
- Potential for higher borrowing costs. The interest on reverse mortgages is typically higher compared to other products.
- Additional costs. There may be additional costs to set up a reverse mortgage such as appraisal fees, application fees and legal fees.
- Early payment penalties. You may have to pay fees or financial penalties if you choose to repay the loan early.
- Reduced inheritance. If your estate must repay the loan, there could be less money for your children and other beneficiaries.
- Increased debt. Reverse mortgages increase the amount of debt you carry and too much debt may limit your financial options.
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.