The Toronto housing market has experienced phenomenal growth over the last two years. According to the Toronto Regional Real Estate Board’s market statistics, the average selling price of a home in Toronto has increased by 18.5 percent compared to last year. The rise in home values spiked an interest in reverse mortgages among homeowners looking to boost retirement income. So, what is a reverse mortgage, and how can it help you?
A reverse mortgage is a type of loan for Canadian homeowners age 55+, allowing them to borrow up to 55% of the current value of their home from their home equity. A reverse mortgage eliminates the fear of losing your home because you won’t be forced to move or sell your home, even if your home value changes. Here are some benefits of taking out a reverse mortgage.
1. Few Restrictions on How You Spend the Money
Whether you want to increase your monthly cash flow, renovate your home, cover medical expenses, or take a vacation, the funds from a reverse mortgage can help you. There are few restrictions on how you choose to spend the money unless it is for illegal purposes. This allows you to access your funds at any point if you’re eligible for a reverse mortgage.
To be eligible for a reverse mortgage, the homeowner and all the individuals listed on the home’s title must be at least 55 years old. You will be required to mention all this information in your reverse mortgage application and seek independent legal advice before approaching a lender.
2. You Don’t Have to Repay Unless You Move/Sell
One of the best things about a reverse mortgage is that you don’t have to repay the loan unless you sell your property, move into a new place or the last borrower of the loan on title dies. However, you may need to pay the loan back if you fail to pay your property taxes, homeowner’s insurance, do not keep your property is a state or good repair or if the property is no longer your principal residence.
Unless you fall under the categories mentioned above, not having to pay the loan can be a significant relief for many homeowners with financial constraints.
3. Option to Choose How You Receive Your Funds
You have the financial flexibility to decide how you want to receive your funds from a reverse mortgage. You can take the total amount at once or spread it into monthly deposits. This choice allows you to allocate your funds according to your individual needs. For example, if you’re taking out the money for a vacation, you may need it at all once as a lump sum. On the other hand, if the reverse mortgage funds are a source of supplemental income, you can choose to receive monthly payments.
4. No Taxes or Monthly Repayments
One of the benefits of taking out a reverse mortgage is you don’t have to pay taxes on the amount. You also do not have to make monthly repayments. Accessing this money allows you to gain a clear picture of your financial status without the burden of repayment.
Disadvantages of Taking Out a Reverse Mortgage
It’s important to consider the flip side of taking out a reverse mortgage. The disadvantages of a reverse mortgage on your home are as follows:
- The typical ways to pay back a reverse mortgage on your home is by selling your home, moving into a new home or if the last borrower of the loan dies. That means that you won’t be able to leave your home in your will as part of your children’s inheritance. If you do choose to repay the principal and interest early, like regular mortgages, there is typically a prepayment penalty.
- Taking out a reverse mortgage on your home will significantly increase your debt load.
- Similar to a regular mortgage, there are set up costs to take out a reverse mortgage including an application fee, home appraisal fee and closing costs. These fees will be deducted from the amount you receive for your reverse mortgage.
- Interest rates on reverse mortgages are significantly higher than on regular mortgages. Further, you will owe more interest on your reverse mortgage the longer the period is before you repay the loan.
- If your home is no longer your principal residence, you will need to repay the loan.
Understanding the loan terms before applying for a reverse mortgage is crucial. If you’re interested in taking out a reverse mortgage, speak to a specialist to determine how much money you are eligible to receive and clear any doubts about the process.
You may be interested in reading, “How to Earn Extra Cash When You Clean Out Your Home“.
There are several good reasons to do a reverse mortgage. But, the downsize is, if the owner passes and there are no beneficiaries, the neighbors have to live with that house falling apart before their eyes until the banks decide what they will do. There is a house down the street from me and it finally went on the market after 3 years of just sitting there. Now no one wants to buy it because its full of mold. Its sad.
I’ve heard a lot about reverse mortgages lately. It was so interesting to get some real information on them.
This seems like a great way to get help with finances. I will have to look into this.
Hi Tara, Yes, taking out a reverse mortgage can provide money you need without having to sell your home! Cheers, Lori
This sounds like an awesome financial option for those over 55. It’s a great help for this category of age!
Hi Catalina, Yes, it’s a great financial option for people over 55 who don’t want to sell their home. Cheers, Lori
I had no idea that a reverse mortgage was complicated. The thing that baffles me is why would a person need to take out a loan on equity they have in their house. Essentially that’s how the reverse mortgage plays out. You get the money now vs when you sale.
I think reverse mortgages are good for people who need money but don’t want to sell their house! Cheers, Lori
Good to know these things. My brother and his family are in Canada. They might find this helpful.
This is really important to know! I hadn’t heard of reverse mortgages before. Thanks for sharing!
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