Reverse mortgages: what you need to know
As an education member who is a 55+ Canadian homeowner, there are a variety of options available for you in retirement.
It is important to look at your retirement needs, understand the options available to you and choose a financial solution that meets those needs. One of those options could be a reverse mortgage. The CHIP Reverse Mortgage by HomeEquity Bank is a versatile financial option that can help solve several financial challenges faced by Canadians 55+. So if you’re among those who have been asking if a reverse mortgage is right for you, here’s what you should know.
What is a reverse mortgage?
A reverse mortgage is a loan that allows homeowners to tap into the equity they’ve built up in their homes and borrow against their properties without having to make payments against the loan until it comes due – usually when the home is sold or the last owner dies. Homeowners can borrow up to 55% of the current value of their home in tax-free cash, in a lump sum, or in regular deposits.
Who is eligible for a reverse mortgage?
To be eligible for a reverse mortgage, you must be a homeowner aged 55 or over.
The pros and cons of a reverse mortgage.
Like most financial decisions, reverse mortgages come with their own set of pros and cons and as an education member, it’s important to consider these before making a choice.
Pros
- Supplemental income: A reverse mortgage can provide you with a steady stream of income during retirement without having to sell your home or move. This can be especially helpful for education retirees who have limited pension or investment income, providing them with the money they need to cover daily expenses, unexpected healthcare costs, or even to indulge in a vacation.
- No monthly payments: Unlike traditional mortgages or loans, reverse mortgages do not require you to make monthly payments. The loan is repaid when the homeowner sells the home or passes away. Not having to make monthly payments can alleviate financial stress and provide an added layer of financial flexibility.
- Stay in your home: Reverse mortgages allow homeowners to remain in their home while still being able to access their home’s equity. This is appealing to many homeowners who want to continue to live in the place they love and the community they know.
Cons:
- Interest keeps accruing: The interest on a reverse mortgage accumulates over time, and the loan amount increases accordingly. So the longer you hold the reverse mortgage, the more interest you’ll owe. Not only that, interest rates on reverse mortgages are typically higher than traditional mortgage rates, currently averaging between 6% and 8%.
- Home equity erodes: While reverse mortgages provide access to home equity, the growing loan balance can quickly erode the amount of equity you have in your home that you might want for other purposes such as covering future expenses or leaving an inheritance.
- Impact on inheritance: When the homeowner moves or passes away, the reverse mortgage becomes due. Heirs must then either repay the loan or sell the home to settle the debt, potentially leaving them with fewer options or a reduced inheritance.
How does a reverse mortgage compare to a HELOC?
A home equity line of credit (HELOC) is another option that lets you borrow the money you need and use your home equity as collateral. Compared to a reverse mortgage, qualifying for a HELOC can be harder in retirement due to lower income streams. And for those who qualify for a HELOC, interest rates are generally lower than a reverse mortgage. But unlike a reverse mortgage, monthly interest payments must be made on time to avoid potential issues like negative credit impact, late fees, or other penalties depending on how large the loan is. The following offers a side-by-side comparison.
| Reverse mortgage | HELOC |
| Can borrow up to 55% of the home’s value | Can borrow up to 65% of the home’s value |
| Must be 55 years or older and be a homeowner | No age limit, but must meet equity and other debt qualification criteria to carry this debt |
| Tax-free cash in a lump sum or in regular monthly installments | Flexibility to take out money when you need it (acts as a revolving line of credit) |
| No monthly payments required | Minimum monthly payment required (usually interest payments) and can pay off principal at any time |
| Terms are decided before funding begins | Lender can alter terms at any point |
| You can choose a 6-month, 1, 3, or 5 year fixed or variable rate | Rates are typically variable and tied to the Bank of Canada’s prime rate (so can increase or decrease if the prime rate changes) |
| Interest rates may be higher since no regular payments are required | Interest rates may be lower as the loan is secured by the home |
“Both a reverse mortgage and a HELOC can be valuable tools to access the equity you’ve built up in your home when you need to access funds,” says Educators Mortgage Agent Level 1, Regional Director, Lending Services, Nick Rao. “And though they have some similarities, they are also very different. The best way to decide if one of them is right for you is not only to arm yourself with information and research on both, but also to seek the advice of a professional who understands and can help you with your unique financial situation.”
Want more information on reverse mortgages? We can help with that.
Educators Financial Group understands your pay grid, pension, and the unique financial challenges you face. That’s how we’ve been able to make education members save for the retirement they want since 1975. We can do the same for you.
Book a complimentary consultation with our lending and investing specialists who will work closely with you to understand your financial picture and help you make the decision on whether or not a reverse mortgage is the right fit for you.
Or have one of our Mortgage Agents contact you.
Brokerage license 12185. O.A.C. Rates are subject to change without notice, some conditions apply. Rates can only be locked in with a complete credit application. Other conditions may apply. Speak to an Educators Financial Group Mortgage Agent for full details.
