A reverse mortgage enables you to obtain a loan secured by your home. Unlike a regular mortgage or a line of credit, you don’t need to repay a reverse mortgage on a periodic basis, such as every month. Usually, you repay a reverse mortgage only when you:
- Sell your home;
- Die (or once both you and your spouse have died).
Here is an example of how a reverse mortgage can be used. Jacqueline and Peter are retired. They would like to finance new projects, like travelling, but they don’t have enough money. One solution would be to sell the home they’ve lived in for 40 years. This isn’t a viable option for them, because they have no intention of moving. With a reverse mortgage, they would have the money they need for their projects. They remain the owners of their home and continue to live there. The mortgage will be repaid only once they’ve sold their home.
What does a reverse mortgage involve?
A reverse mortgage allows you to:
- Convert a part of the value of your home into cash (in the form of a loan);
- Borrow up to 55% of the value of your home. You can use this money after repaying any loans secured by your home, like your mortgage balanceA mortgage is a right granted on property to guarantee payment of a debt.
When a bank grants a mortgage loan for the purchase of a house, it receives a mortgage in exchange: The person who takes out the loan continues to be the owner of the house, but if they do not repay the loan according to the terms of their contract, the bank can sell the house to satisfy the debt.
Although the terms “mortgage” and “mortgage loan” are often used as synonyms (for example, “I’ve finished paying off my mortgage”), they are two separate notions for lawyers and notaries. .
Note the following about the loan:
- The amount will vary according to the value and location of your home and your age.
- The amount may increase with your age and the value of your home.
- You must pay interest on this loan.
- It will have to be repaid no later than upon the death of the surviving spouse, if you sell your home or if you move.
To take advantage of a reverse mortgage, you must be 55 or over (both spouses) and own your home.
What are the advantages of a reverse mortgage?
- You remain the owner of your home. The lender can’t ask you to sell or move to repay the loan. You must, however, continue to pay property tax, maintenance costs, and insurance.
- You can use the borrowed amount to support your lifestyle, increase your retirement savings, invest, purchase an annuityAn annuity is a contract that allows you, once you have paid a certain amount, to receive periodic payments over a given period of time. There are several types of annuities, including:
Etc., avoid having to sell property or investments at an inopportune time, etc.
- No repayment is required as long as you live in your home. You can repay some or all of the interest every year.
- You won’t pay taxes on the amount you receive.
- The repayment amount will never exceed the value of your home. Your heirs are therefore protected. If they sell your home, they can be certain that its value will cover the entire debt.
What are the disadvantages of a reverse mortgage?
Since you aren’t required to repay the loan before the maturity date, the interest accumulates.
A reverse mortgage isn’t the right solution if you want to leave the value of your property as an inheritance. Your debt could increase to the point of being very close to the value of your home.
Your heirs will have to sell your home and then use a portion of the proceeds to repay the loan.
- A penalty may apply if you repay the full amount before the end of a minimum time period. This penalty is lower if the surviving spouse leaves the home to live in a retirement or long-term care facility. There is no penalty when the surviving spouse dies.
Before deciding on a reverse mortgage, take the time to look into its advantages and disadvantages.
- Are you absolutely intent on holding on to your home?
- Instead of a reverse mortgage, perhaps you could obtain a mortgage line of credit at a lower cost.
Documentation and tools
- Guide to Financial Planning for Retirement – 2017-2018 Edition (pdf - 3 MB)This link will open in a new windowUpdated on 18 August 2017 This is the 2017-2018 edition of the Guide to Financial Planning for Retirement. The partners who make up the Question Retraite group have combined their expertise to make your financial planning for retirement pleasant and uncomplicated.