As people grow older, they want to start saving up for their retirement. However, it can be challenging for some to accumulate that kind of money over time, due to financial restraints. If this sounds like you, you may be wondering: how does a reverse mortgage work in Canada?
The reverse mortgage scheme has been around for over 25 years and has helped many Canadian citizens add value to their retirement planning. However, not many homeowners know about this benefit that their property provides. If you want to learn about basic mortgages before understanding their reverse counterpart, Mortgage Maestro can help you out.
Wondering how reverse mortgage works? In this article, we will discuss the general grounds of reverse mortgaging in Canada and how it can help homeowners add more financial benefits to their lives post-retirement.
How Does a Reverse Mortgage Work?
If you live in Canada and own a home, a reverse mortgage can be useful to make some money. It is the loan amount that you receive against up to 55% of your home’s value. This way, you can acquire a non-taxable amount from your home’s equity without selling it.
Any homeowner who is 55 years of age or older is eligible for a reverse mortgage, which would allow them to start their retirement planning at ease. You can utilize the cash amount from a reverse mortgage to pay off overdue debts, renovate your home, and more.
This arrangement is named “reverse mortgage” as there is no need for you to pay it back in monthly installments. You can repay the amount you owe when you are moving out or selling the home.
How Can You Use The Reverse Mortgage Amount?
Financial advisors suggest that you pay off other mortgages (such as HELOC) and any outstanding loans with the home as security. However, if it is impossible due to financial problems, a reverse mortgage can help you pay off such debts.
You can use the amount from the reverse mortgage to pay off your overdue debts and expensive bills. It also helps to repair and renovate your current property if you want to increase its value faster. You can then use the profits to pay off this mortgage.
Seniors in Canada have various financial needs that the reverse mortgage can fulfill. You can opt to take out the full lump sum. There is also an option to withdraw required amounts as needed over time. However, this is up to the lender so you can ask about their provisions before taking out a reverse mortgage.
A reverse mortgage clears up your path to plan your retirement and move out of your house when it is time. It provides financial security to seniors looking to clear their financial slate.
Are You Eligible for this Mortgage?
The qualification criteria for a reverse mortgage in Canada are as follows:
- You must be a Canadian homeowner
- Your and your spouse’s age should be 55 or older
The mortgage amount is always up to 55% of your home’s equity. Doing so helps you pay off an amount that is not more than the home’s value. Lenders also require you to live there for at least six months annually to consider it your primary residence. If there are more people whose names are on the home’s title, make sure to include them. Not to forget, they also need to be 55+ of age to qualify for the reverse mortgage.
The following are the points that lenders assess when you apply for a reverse mortgage on your home:
- Your property’s location
- The dwelling type
- Its appraisal value and its current condition
- Your home’s equity amount
If you get the green light after these criteria are assessed, then you are eligible for a reverse mortgage on your home.
How Much Will a Reverse Mortgage Cost You?
Your mortgage broker can help you evaluate the incurred cost of taking out a reverse mortgage on your home. Reverse mortgage interest rates are higher than regular mortgage rates. The following are factors that can help you assess reverse mortgage expenses:
- The setup fee
- The fees for home appraisal services
- Legal advice fees and expenses
- The prepayment penalty if you wish to pay off the reverse mortgage before its due date
These fees vary from one lender to another, so make sure to shop around.
Can a Lender Default Your Reverse Mortgage
If you do not follow the legal contract set by your lender, there can be repercussions. The criteria to default vary between lenders, and it is best to ask them beforehand so that you know what not to do. The following are the generic reasons that can have your lender default your reverse mortgage:
- If you do something to the house that lowers its value
- If you use the mortgage money to invest or spend on something illegal
- If you were not truthful with details while applying
- If you break any other contract rule
Staying away from these activities can help you enjoy reverse mortgage benefits until its repayment period.
Things To Ask Your Reverse Mortgage Lender in Canada
A reverse mortgage makes it easier for Canadian citizens who are 55 years and older to utilize their home equity to receive non-taxable cash benefits. Make sure to ask your lender the following:
- What fees should I be paying?
- What is my approximate interest rate?
- Are there any special penalties for paying off the mortgage within an unspecified period?
- How much time will be allotted to pay off the mortgage if I pass away before repayment?
- What should I do if the repayment amount is higher than my house’s value during repayment?
Endnote
Have you ever wondered: how does a reverse mortgage work in Canada? Now you know the details.
A reverse mortgage is a safe way for Canadian seniors to acquire a lump sum amount, clear off debts and pay for necessities. You can cash off from your home’s equity while not needing to pay interest until you sell the house or move out.
Before opting to reverse mortgage your home, talk to your mortgage broker to know all the terms and conditions and enjoy its long-term benefits!