Reverse mortgages have gained in popularity in the last few years. Reports suggest that reverse mortgage demand surged roughly 30 per cent in 2022 post-pandemic, with originations topping $1 billion for the second consecutive year. According to the Office of the Superintendent of Financial Institutions (OSFI), Canadians were carrying more than $8.2 billion in reverse mortgage debt outstanding at the end of June 2024. And the trend is growing.
Why are more Canadians taking on reverse mortgages, or considering this financial product to complement their living standards? They are looking at their homes as a reliable way to fund their retirement without having to hit the sell button.
What is a Reverse Mortgage?
A reverse mortgage is a loan that allows borrowers to receive money from home equity without having to sell the residential property. Homeowners can borrow up to 55 per cent of the present home value, but the final amount will depend on the applicant’s age, the property’s value, and the lender. The principal amount is repaid when you sell it, move out of your home, or the borrower passes away.
Typically, these are the eligibility requirements for being approved for a reverse mortgage:
- The homeowner must be at least 55 years of age.
- You must obtain independent legal advice and provide proof.
- The home you reverse mortgage must be your primary residence (at least six months per year).
- Homeowners must pay their property taxes and maintain their property.
So, is applying for a reverse mortgage advantageous when you need the money?
The Pros and Cons of a Reverse Mortgage
Roughly one million older Canadians are living on a low-income basis. Suffice it to say; it is a struggle for many seniors nationwide to keep their heads above water, particularly as the gap between public pension schemes and living standards widens.
That said, before applying for a reverse mortgage, it is critical to understand the benefits and drawbacks of utilizing this financial product to support your living standards.
Here are the pros and cons:
Pros
The first chief advantage is that you can access funds to help offset costs that might exceed your income, be it from employment or your pension.
Another attractive benefit of a reverse mortgage is that you are not required to make regular payments on the loan. You can repay the principal and interest in full at any time, which can be terrific, especially when you do not have any heirs or family members who will receive the property following your death.
Ultimately, when you are too old to work and want to increase or maintain your quality of life, a reverse mortgage can help.
Cons
The length of the reverse mortgage is critical since you might outlive the term if you take it too early.
Meanwhile, the longer you go without making payments to the lender, the more interest will accumulate on the reverse mortgage. The average interest rate for reverse mortgages is as high as nine percent.
Because you are borrowing against your home equity, and the interest charges compound, you will increase the amount of debt you carry, meaning your heirs will have less to inherit.
You could lose your house to foreclosure if you do not pay your property taxes or other home ownership-related costs.
Final Thoughts
Today, many homeowners are exploring different ways to achieve home ownership, and many of those who already own, are curious about how to tap into the financial rewards. A higher cost of living and future economic uncertainty makes a reverse mortgage appealing to some, and a way to age in place in retirement.
