Financial security in your golden years is an important part of retirement planning. As a result, reverse mortgages are becoming increasingly popular in Canada, which allows homeowners over the age of 55 to receive payment free loans based on the equity in their home. Despite the numerous advantages of reverse mortgages, many Canadians are still not familiar with them and have lots of questions about how they work, and in particular, what happens with a reverse mortgage when you pass away?
Dealing with a reverse mortgage after death may seem complex and confusing but it is not in reality. By better understanding what happens with a reverse mortgage when a homeowner dies, we hope it will help you manage your estate more effectively and feel more comfortable in getting a reverse mortgage to improve your retirement years.
What Happens If I Die and My Spouse is a Surviving Homeowner?
If there are two homeowners who take a reverse mortgage and one dies, then the reverse mortgage continues unchanged for the surviving homeowner. The surviving homeowner can remain living in the home for the rest of their lives or until they decide to sell the property.
It is important for any surviving homeowners to keep up with their obligations under the reverse mortgage agreement. This includes paying property taxes and homeowners insurance premiums on time, maintaining necessary repairs on their homes, and continuing to live in their homes as their primary residence.
What Happens When the Last Homeowner Dies?
All reverse mortgages become due and payable when the last homeowner dies. When the last homeowner has died, the homeowner's estate and their heirs will typically decide how to repay the reverse mortgage. They have several options available, as discussed in the next section.
How Heirs Can Pay Off a Reverse Mortgage
When a reverse mortgage borrower passes away, their heirs are left with two options:
- Keep the home and pay off the loan, or
- Sell the home and pay off the loan.
Option 1: Keep the Home, Pay Off The Loan
If your heirs choose to keep the home and pay off the loan, they can do so by using their own funds or by refinancing the reverse mortgage loan into a traditional mortgage. They have up to 180 days to pay off the reverse mortgage loan balance.
If the home was your principal residence, then your heirs will not pay tax when they inherit the home. If they decide to sell it in the future, and the home has appreciated in value since they inherited it, they will pay tax on 50% of that increased amount.
Option 2: Sell the Home, Pay Off the Loan
If your heirs decide to sell the property, any remaining funds after paying off the reverse mortgage loan balance belong to them. If the reverse mortgage loan balance exceeds the property value, your heirs will not be responsible for the difference. This is a key protection built into Canadian reverse mortgages.
Since your heirs are selling the home immediately upon inheriting it, they likely will not pay any income tax on the sale of the property.
Selling the Home vs Keeping the Home
Deciding whether to sell or keep the home can be a difficult decision for your heirs. Selling the home may be more straightforward and quicker, but it could also mean losing out on potential appreciation in property value over time. On the other hand, keeping the home could allow your heirs to take advantage of property appreciation but will usually require them to qualify for a traditional mortgage in order to pay off the reverse mortgage.
There are pros and cons associated with both options that should be carefully considered before making a decision. For instance, if your heirs decide to sell, they may need to pay closing costs and real estate commissions which can eat into their profits from selling.
It's crucial for both reverse mortgage borrowers and their heirs to understand the options when it comes to repaying a reverse mortgage after death and plan accordingly. It's recommended that homeowners discuss these options with their family members before taking out a reverse mortgage so everyone is aware of what will happen upon their passing.
Reverse mortgages can be very helpful to retired Canadians in their later years and should not be seen as a problem for the borrower’s estate to deal with. By communicating your wishes with your heirs and explaining their options to them, they should feel comfortable with their options when they inherit your home.
FAQ's about Paying Off Reverse Mortgages
Here are some frequently asked questions to help you understand how to pay off a reverse mortgage after the borrower's death.
Q: Who is responsible for paying off the reverse mortgage after the borrower dies?
A: The borrower's heirs or estate are responsible for paying off the reverse mortgage. They have up to 6 months to repay the loan.
Q: What happens if the home is not worth enough to pay off the loan?
A: If the property value is less than the balance of the loan, then the reverse mortgage lender will take a loss on the loan. Your estate and your children will not be responsible for any difference.
Q: Can heirs keep the home after paying off a reverse mortgage?
A: Yes, heirs can keep the home after paying off a reverse mortgage. They can either refinance into a traditional mortgage or use their own funds to pay off the reverse mortgage. Your heirs can then move into the home or rent it out.
Q: What happens if heirs do not want to keep the home?
A: If heirs don't want to keep the home, they can sell it and use proceeds from sale of property to pay back the reverse mortgage loan amount. Any remaining proceeds will go towards their inheritance.
Q: Are there any tax implications when paying off a reverse mortgage?
A: Typically, there are no tax implications when paying off a reverse mortgage, just as there would not be any tax implications when paying off a traditional mortgage. Still, it is recommended that you consult with your tax advisor before making any decisions.