Over the past few years, reverse mortgages have been gaining traction as a popular financial tool among Canadian seniors, retirees and homeowners over the age of 55.
But many people remain unfamiliar with this type of home equity loan or believe reverse mortgages to be scams.
As a result, we spend a lot of time speaking with our clients about the advantages of reverse mortgages and debunking reverse mortgage myths that exist.
You’d be surprised how many people end up getting this special loan for homeowners over the age of 55 after speaking with us and learning the truth about how reverse mortgages work.
While we obviously can’t speak to everyone, we do want the truth about reverse mortgages to be widely available so we are going to post this article on our website.
We hope you find this article useful, and if you have any questions afterwards, reach out to us and we’d be happy to answer any of your questions.
With that, here are the top 10 benefits of reverse mortgages, as compiled by our team of reverse mortgage experts.
Reverse Mortgage Benefit #1 - Income Boost
With the costs of living rising over the years, retirees are having a difficult time making do just on their pension income alone.
As a result, many seniors are getting a reverse mortgage because it allows them to access their home equity without selling the home.
Since reverse mortgages are quite flexible, we can help retirees set their reverse mortgage so that they receive enough cash every month, along with their CPP and OAS payments, to live comfortably and pay their bills easily.
In other words, we use this type of a home equity loan to provide a steady source of additional cash every month to homeowners.
Reverse Mortgage Benefit #2 - No Monthly Payments
Having a beautiful, mortgage free home in retirement is wonderful, but it means nothing if you cannot afford to pay your bills or have anxiety over rising interest rates and payment affordability.
A million dollars of home equity does not pay the bills. That money is locked up in your home and won’t be available until you sell the home.
In order to make ends meet in retirement, our clients are looking for ways to reduce their monthly payments—and that’s when a reverse mortgage home equity loan becomes a terrific option.
Since a reverse mortgage is designed for homeowners who are typically retired and only receiving pension income, monthly mortgage payments are not required.
By not having to make monthly mortgage payments, a retiree’s cash flow can improve dramatically.
To be clear, Interest is still calculated on the loan every month but, instead of requiring a monthly payment from the borrower, the interest is added to the loan balance.
As this interest gets added every month to the loan amount, the loan balance increases over time (hence the name “reverse” mortgage since the balance moves in the opposite direction to traditional mortgages).
The reverse mortgage home equity loan is repaid when a homeowner sells the property, stops living in it or passes away.
Until then, though, the pressure on a homeowner of making large monthly payments is avoided and retirees are able to spend their monthly pension income on other necessities, such as food, gas, property taxes and medical costs.
Reverse Mortgage Benefit #3 - Stay in Your Home
The one thing we hear repeatedly from clients is the desire to remain in their homes for as long as possible.
Aside from the precious memories they have built up over the years, retirees have strong emotional attachments to their local communities.
These clients do not want to downsize unless they absolutely must.
For homeowners who are thinking of downsizing for financial reasons, we recommend they consider getting a reverse mortgage instead.
Reverse mortgages offer homeowners the benefit of continuing to live in their homes while enjoying the financial advantages of the loan.
Plus homeowners can avoid the significant financial and emotional costs of downsizing.
Homeowners can use the money from a reverse mortgage for home repairs, home maintenance or renovations to make the home more accessible as they age.
Reverse Mortgage Benefit #4 - Keep Ownership
A common myth about reverse mortgages is that homeowners will lose ownership or control of their property.
This is not true!
Just like with a traditional mortgage, you remain the owner of your home when you get a reverse mortgage.
As the owner, you have the right to live in the home and make decisions about home improvements, maintenance, and any other aspects of homeownership.
As the owner, even after you get a reverse mortgage, you are responsible for paying the property taxes, keeping the home insured and maintained in good condition.
Reverse Mortgage Benefit #5 - Negative Equity Guarantee
Both HomeEquity Bank and EQ Bank guarantee that homeowners and their heirs will never owe more than the value of their home when it’s time to repay the reverse mortgage home equity loan.
This promise is called the “no negative equity guarantee” and is meant to comfort borrowers that they will never have to dip into other assets in order to pay off the reverse mortgage.
To date, none of our clients has faced this situation, mostly because lenders are very careful to not lend you too much money.
By keeping the loan amount much smaller than the house value, the lender and the borrower create an “equity cushion” that is able to adjust for any drops in the value of the home.
This “equity cushion” is the reason seniors can only access up to 55% - 59% of the home’s value with a reverse mortgage.
The remaining home value is being used as the “equity cushion to absorb the future interest and possible dips in property value.
If you have any questions about how this “no negative equity guarantee” works, reach out to us and we’ll be happy to explain it further.
One final key point on this specific topic: NOT ALL reverse mortgage lenders offer this protection to borrowers.
This means if you are getting a reverse mortgage that is not a CHIP reverse mortgage or an EQ reverse mortgage, make sure you do not get too large of a reverse mortgage.
An experienced reverse mortgage specialist can walk you through the best way to select a reverse mortgage lender in these scenarios.
Reverse Mortgage Benefit #6 - Flexible Ways to Get Money
Reverse mortgage products were designed to be very flexible in order to meet the different retirement income needs of older homeowners.
In our experience, most people are surprised to learn that they can get their reverse mortgage amount in 4 different ways:
- Lump sum
- Scheduled installments
- Only when requested
- A combination of the above
If you get your reverse mortgage home equity loan money all at once, then your loan is essentially set up like a traditional mortgage and you start paying interest on the money when it is given to you.
This lump sum option is useful for clients who have clear needs to receive a large amount of money up front (example, debt payments, home purchase, renovations, etc.)
If you don’t have clear up-front expenses to pay for, then it would make sense for you to spread out your reverse mortgage using scheduled installments.
If this option appeals to you, then we are going to discuss how frequently you want the installments and how much you wish to receive.
With both the CHIP reverse mortgage and the EQ mortgage, you can receive the scheduled installments (minimum of $1000) as follows:
You can receive these scheduled installments to boost your monthly cash flow and your CPP and OAS pension payments like we discussed above.
Here is a key advantage of this scheduled installment approach: you can minimize your long-term interest charges because you will only be charged interest on money when it has been paid to you.
Only When Requested
When a client is looking for a home equity line of credit (HELOC) solution, we can set up your reverse mortgage to only send you money when you request it, essentially creating a “reverse mortgage home equity line of credit” for you.
You do not receive scheduled installments in this arrangement and you would need to contact your lender everytime you wish to access your loan.
You would only pay interest on the money you use, similar to a traditional HELOC.
This approach is terrific for homeowners who are looking for a financial safety net for emergencies but cannot qualify for a traditional HELOC because of their reduced pension income.
Remember, if you are an older homeowner looking for a HELOC, you will need to show your bank you have enough income to make monthly payments on your HELOC.
Your house may be mortgage free but your HELOC approval will depend on your monthly income—if you only receive CPP and OAS, then you will likely not be approved for a very useful HELOC amount.
We help many clients get a CHIP reverse mortgage (or an EQ mortgage) after they have been declined for a traditional HELOC.
Once our clients understand they can get the approval amount they want and only pay interest on the money they use, they are happy with this reverse mortgage “HELOC” solution.
Combination Set Up
Our clients don’t always have clear cut needs; often they need money for a little bit of this…and a little bit of that.
In these circumstances, we can set up the reverse mortgage in such a way that it suits their overall needs.
For example: Jane is 73 years old and has been approved for a $750,000 reverse mortgage loan.
She wants to complete $150,000 in renovations, give herself an additional $2500 every month and give an early inheritance of $100,000 to her 2 grandchildren when they are ready to buy their first homes.
In this example, we would set up her loan to give her an initial advance of $75,000 to start her renovations and schedule her monthly installments of $2,500 to start right away.
She would request the additional $75,000 for the renovations when they are completed and she would request $100,000 when her first grandchild is ready to buy their home. The additional $100,000 would only be requested when the second grandchild is ready to buy their first home.
By spreading out the reverse mortgage advances, we make the reverse mortgage fit her needs and reduce her long-term interest costs.
Overall, we think reverse mortgages can be highly customized to fit your actual needs.
Make sure you discuss your financial needs with your advisor before making a decision about getting (or not getting) a reverse mortgage.
Reverse Mortgage Benefit #8 - You Can Make Payments
We’ve said many times that reverse mortgages do not require monthly mortgage payments to be made by the borrower.
But what if a homeowner wants to make monthly mortgage payments?
In these cases, both the CHIP reverse mortgage and the EQ Bank reverse mortgage allow borrowers to repay the monthly interest on their reverse mortgage.
This option is attractive to seniors who want to use the reverse mortgage like a true HELOC and have the ability to make monthly repayments without compromising their retirement lifestyle.
Reverse Mortgage #9 - Bad Credit OK
If you have bad credit, then you know how difficult it can be to get approved for a traditional mortgage or HELOC.
Fortunately, both CHIP reverse mortgages and EQ mortgages do not have minimum credit requirements for borrowers in order to get approved.
These lenders will focus on your age and your property value when reviewing your application, not your credit score.
A bad credit score will not result in your approval amount being decreased either.
Reverse Mortgage #10 - POA OK
If you try to use a Power of Attorney (POA) when getting a traditional mortgage or HELOC, be prepared for lots of questions and potential delays.
Traditional lenders are just not comfortable when a POA is being used because it increases the risk of mortgage fraud (historically, POA’s have been involved in a number of fraudulent transactions).
Many lenders will cancel your approval if it requires the use of a POA. To them, your one translation is just not worth the risk of getting involved with a high-risk mortgage.
Reverse mortgage lenders, on the other hand, know that many of their borrowers will be older and have signing issues. These lenders are much more comfortable completing a mortgage transaction involving a POA.
As a result, you can easily get a reverse mortgage if one of the homeowners is unable to sign and a POA needs to be used to complete the mortgage paperwork.
Note, the reverse mortgage lender will require a copy of the POA to confirm its validity before completing the transaction.
Other Reverse Mortgage Benefits
Here are some other reverse mortgage benefits that we’ll quickly share with you:
Easy, Fast Approval
If you remember how complicated it can be to get a traditional mortgage or home equity loan, then you will be delighted to know that a reverse mortgage approval is much easier to get.
You will not need to collect tax returns, or dig up copies of old mortgage and purchase documents etc.
We can get your reverse mortgage approved with copies of your identification and your recent pension statement—that’s it.
Since your reverse mortgage is a loan that will eventually need to be repaid, you do not pay income tax on any money you receive from it.
There are no withholding taxes to pay on the funds and getting a reverse mortgage loan will not affect your government benefit eligibility either.
Want a reverse mortgage for as little as 6 months? We can help with that.
This option is perfect for retirees who are going to be in the process of selling their home and buying a new home.
They can use the reverse mortgage to improve their home before they sell it or before they move into it.
Some clients also use the money to make large competitive deposits on their new home purchase.
3 Borrower Responsibilities
Having a reverse mortgage is not meant to be a complicated exercise for a homeowner.
There are no regular reporting or inspection requirements. The homeowner only needs to keep the home in good condition, keep the insurance current and pay the property taxes when due.
The reverse mortgage lender has no other requirements for the homeowner.
So long as a retiree complies with these 3 obligations, their reverse mortgage will remain in good standing and can be renewed indefinitely.
Different Terms/Rates Options
Reverse mortgage lenders know that borrowers have different needs and different priorities.
In that regard, we can set up your reverse mortgage to be either a fixed interest rate or a variable interest rate and you can select a mortgage term that ranges from 1 year to 5 years.
Easy to Renew
And finally, a reverse mortgage has no complicated renewal process when the term matures.
A borrower will receive a renewal form that clearly sets out their term and interest rate options. This form is easy to complete and simply needs to be mailed back to the lender.
A borrower does not need to “re-qualify” for a new reverse mortgage every time it matures.
Reverse mortgages in Canada can offer many benefits to any homeowner over the age of 55.
From tax-free cash, and no monthly payments to the freedom to stay in your home and maintain ownership, this financial tool can be an attractive option for many homeowners.
While we know that this option isn’t right for everyone, we do think more retirees should consider it in order to improve their retirement lifestyle.
If you want to learn more about reverse mortgage options, the easiest and least stressful way is to consult with a reverse mortgage expert.
These advisors can easily guide you through the entire process, including telling you how much of a reverse mortgage you could qualify for and whether it is the right financial tool for you.