Are you a retired homeowner or nearing retirement, wondering how to make the most of your golden years without financial stress?
If so, a reverse mortgage might be your golden ticket to achieving financial independence. This financial product is becoming increasingly popular with Canadians in their retirement years.
But when is a reverse mortgage a good idea?
In this article, we will share with you examples of when a reverse mortgage might be a good idea for a homeowner who is 55 years or older.
A reverse mortgage may be a good idea for you in any of the following circumstances:
- A mortgage after the age of 55 that is unlikely to be paid off soon
- A HELOC balance that is increasing
- “Sticker Shock” after seeing your new mortgage renewal rate
- No family to pass your inheritance onto
You Are Struggling:
- Financially and are not getting any support from your family
- To pay your bills every month or avoiding paying expenses to make ends meet
You are Planning:
- On downsizing to save money but would stay if you could afford to
- On giving inheritances to your family but wouldn’t mind giving it to them early
- Is struggling financially but you cannot afford to help them
- Has asked for an early inheritance but you don’t know how to give it without risking your own retirement
- Current medical and personal care health costs are increasing
- Savings or pension will run out before you die
Understanding Reverse Mortgages
A reverse mortgage is a type of loan that allows homeowners, usually of age 55 and above, to convert a portion of their home equity into cash. Occasionally, you may see reverse mortgages being referred to as “equity release” mortgages. Unlike a traditional mortgage or a Home Equity Line of Credit (HELOC), you don't need to make monthly payments.
Instead, the loan, along with the accumulated interest, is repaid when the home is sold, or the last borrower passes away. Reverse mortgages are useful tools for anyone's retirement planning, as they are specifically designed for people to have financial freedom during their retirement years.
To learn more about reverse mortgages, you can read some of our other articles:
- Understanding the Benefits of Reverse Mortgages
- Difference between Reverse Mortgages and HELOCs
- Considering a Reverse Mortgage - Why You Need a Mortgage Broker
- CHIP Reverse Mortgage vs Flex Reverse Mortgage
Pros and Cons of Reverse Mortgages
Like any financial product, a reverse mortgage comes with its pros and cons. On the plus side, it provides a steady income stream, doesn't require monthly payments, and allows you to stay in your home. You can use the funds for any purpose (most popular is debt consolidation) and do not need any income in order to qualify.
On the downside, the interest rates are typically higher than other types of mortgages, and the loan amount, along with the interest, could reduce the equity you have in your home over time.
It's essential to weigh these factors and consult with a financial advisor before deciding if a reverse mortgage is right for you. We’ve written more about the advantages and disadvantages of reverse mortgages here:
Comparing Canadian and American Reverse Mortgages
We should make a quick reference to American reverse mortgages for one reason: most of the top ranking online material on Google comes from American websites!
While reverse mortgages are available in both Canada and the United States, there are some key differences in eligibility that Canadians should be aware of. For example, there are only 2 large reverse mortgage lenders in Canada while there are many lenders in the United States. Also, American lenders cannot provide reverse mortgages to Canadians!
We’ve written more about the differences in this article:
The takeaway for readers is that online materials should be carefully checked to make sure they apply to Canadian homeowners.
When a Reverse Mortgage May Be a Good Idea
1. You Have No Heirs
For homeowners without heirs, the biggest concern with getting a reverse mortgage does not apply. Homeowners without heirs should use a reverse mortgage to live their life to the fullest, or use the reverse mortgage funds to donate to charities and see the benefit of their donations. Remember, a reverse mortgage will not affect your government benefits such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
2. Your Family Is Not Supporting You
It’s difficult for anyone to admit if their family is not providing financial or emotional support to a parent. Sadly, we see many retirees suffer alone while fully intending to give their families as much of an inheritance as possible. In these circumstances, we simply ask our clients to reconsider their priorities and to focus on their own needs first.
If the homeowners’ children are not supporting their parents, then we recommend the parents take a reverse mortgage to live their lives with dignity and without stress. They should not focus on their children's inheritances.
3. You Want to Age in Place
Retirement is a new chapter filled with changes and uncertainties, especially when it comes to housing. If moving into a retirement home sends shivers down your spine or if you find yourself with limited family support, a reverse mortgage can be the solution for you.
By converting part of your home equity into cash, you can afford in-home care or necessary home modifications, allowing you to age in place gracefully in your own home.
You can learn more about aging in place here:
4. You are Over 55 with a Mortgage
If you're over 55 and still juggling with a mortgage, a reverse mortgage can be your solution to achieving financial freedom. The key here is to look at how long it will take for you to fully pay off your mortgage and how affordable your mortgage payments are.
Based on our experience, you should strongly consider a reverse mortgage if:
- Your mortgage will not be paid off in a few years (the older you are, the shorter your timeline should be), or
- Your current mortgage payments are difficult to make, or will be difficult to make once you retire, or
- You are delaying your retirement in order to keep your mortgage payments affordable.
We tell our clients to be realistic when looking at how long it will take for them to become mortgage free. If they are in their 60’s or 70’s and still carrying a mortgage, our recommendation is they get a reverse mortgage since they are unlikely to ever be mortgage free. Instead, they should focus on the quality of their remaining years instead of their financial goal to be mortgage free.
5. You are Experiencing Cash Flow Problems
Retirement should be a time of relaxation and enjoyment. But if monthly cash flow issues are raining on your parade, a reverse mortgage can be your solution. By allowing you to tap into your home equity, a reverse mortgage can provide a steady stream of income. Whether it's daily living expenses, medical bills, or unexpected costs, a reverse mortgage has got you covered, providing financial stability and peace of mind.
6. Not Enough Pension Income or Retirement Savings
Not everyone has a hefty pension or a mountain of retirement savings to rely on. If you find yourself constantly checking your pension details or losing sleep over dwindling savings, a reverse mortgage can help. The funds from a reverse mortgage can supplement your income, ensuring you enjoy your retirement without constantly worrying about finances.
7. Too Dependent on a HELOC
A Home Equity Line of Credit (HELOC) can be a useful tool for emergency funds, but it can also become a financial burden if homeowners use it regularly to pay off credit cards or to consolidate multiple debts.
The key question is: can a homeowner with a fixed pension income make the regular monthly payments—especially as interest rates keep rising? Are payments being made? Is the HELOC balance actually increasing?
A reverse mortgage can be a viable solution in such scenarios. It allows you to pay off your HELOC, freeing you from monthly payments and potentially high interest rates, especially in our current rising interest rate environment. With a reverse mortgage, you can regain control of your finances and breathe a sigh of relief.
8. Mortgage Interest Rates Too High
Mortgage renewal time can sometimes come with a nasty surprise for retired homeowners on a fixed pension income—due to increasing interest rates, all mortgage holders are having to deal with higher monthly payments. If you're facing sticker shock at mortgage renewal time, a reverse mortgage can be an alternative to selling the home.
By converting your home equity into cash, a reverse mortgage can help you navigate the financial turbulence of mortgage renewal, providing a smoother journey into your retirement years.
9. You Can’t Help with Family Financial Struggles
Seeing your family struggle financially can be heart-wrenching, especially when you feel powerless to help because you are on a fixed pension income. A reverse mortgage can provide a way for you to lend a helping hand.
By tapping into your home equity, you can access funds to support your family without compromising your own financial security. It's a win-win solution that brings peace of mind to you and your loved ones.
10. You Don’t Want to Downsize or Sell Your Home
Downsizing can be a practical solution for some, but it's not for everyone. To see if it is a good choice for you, read our article:
If you're considering downsizing for financial reasons rather than lifestyle choice, a reverse mortgage might be a better solution. Reverse mortgages allow you to stay in your home while accessing the funds you need. So, before you start packing boxes, consider if a reverse mortgage could be the right move for you.
Remember, downsizing is very expensive and should only be done after you fully understand all the financial and emotional costs involved. Consider using a reverse mortgage as an alternative and stay in the home and neighborhood you love.
11. Your Healthcare Costs are Becoming Unaffordable
Healthcare expenses can skyrocket as we age, and for many, this can be a pill too hard to swallow. A reverse mortgage can help manage these increasing costs in the comfort of your own home.
Whether it's for medications, in-home care, or medical procedures, a reverse mortgage can provide the financial support you need to avoid moving into an assisted living facility.
More importantly, it also means you do not need to worry unnecessarily about how to obtain the healthcare services or medications you deserve. Your home, using a reverse mortgage, is the solution.
12. Your Dream Retirement is on Hold
If you've always dreamed of exploring the world but your current finances are keeping you grounded, a reverse mortgage can give you wings. By tapping into your home equity, you can fund your travel adventures without draining your savings or living on a shoestring budget.
13. Early Inheritances and Livings Bequests
Planning on giving big inheritances to your loved ones? Consider the concept of living bequests (also known as “living will”) instead. A living bequest is a gift you give to your loved ones while you are alive, rather than when you have died. A reverse mortgage can provide the funds for you to give your loved ones their inheritance now, when they might need it most.
It's a way to see the joy your gift brings to your loved ones and can bring more immediate benefits than a traditional inheritance.
14. Early Inheritance Requests: A Delicate Balance
We are seeing more clients getting requests from their family for early inheritances. These family requests for early inheritance can put you in a tough spot. You want to help your loved ones financially, but you also need to secure your own financial future.
A reverse mortgage can help strike a delicate balance. They allow you to access your home equity to provide an early inheritance without jeopardizing your financial stability. It's a solution that respects both your needs and the needs of your family.
Alternatives to Reverse Mortgages
While a reverse mortgage can be a lifeline for many, it's not the only financial tool available. Other options include down sizing to a smaller home, renting out a portion of your current home, or taking out a traditional home equity loan or line of credit.
Each of these options has its own set of benefits and drawbacks. For instance, downsizing can provide a lump sum of money but involves moving and significant financial and emotional costs. Renting out a portion of your home can provide regular income but also comes with the responsibilities of being a landlord.
It's crucial to explore all your options and obtain financial advice before making a decision.
How to Apply for a Reverse Mortgage in Canada
Applying for a reverse mortgage in Canada involves several steps. First, you should chat with a mortgage broker to discuss your options and determine if a reverse mortgage is the right choice for you. Mortgage brokers will provide you with unbiased advice and recommend products a specific reverse mortgage lender may not have available. They can also access interest rate discounts or get exceptions that you would not be able to obtain yourself if you dealt directly with a reverse mortgage lender. Remember, you do not pay extra to use a mortgage broker, so you should always take advantage of their experience and benefits.
Next, you'll need to have your home appraised to determine its value and how much you can borrow.
Finally you will meet with a lawyer to obtain independent legal advice before signing any loan agreement to ensure you fully understand the terms and conditions.
Interested in CHIP reverse mortgages? You should read the following:
To Sum Up
A reverse mortgage can be a valuable financial tool for homeowners approaching (or already in) retirement. In this article, we’ve outlined the many scenarios where a reverse mortgage would be a good idea for homeowners over the age of 55.
If you are not sure what you should do in your own situation, please speak to a financial advisor who is experienced in arranging reverse mortgages for Canadian homeowners.
Q1. Can you get a reverse mortgage using a power of attorney?
A. Both HomeEquity Bank and Equitable Bank permit homeowners to get a reverse mortgage with the use of a Power of Attorney, if one of the homeowners is unable to review or sign the documents themselves.
Q2. How much does it cost to get a reverse mortgage?
Homeowners will need to pay $300-$500 for a home appraisal, $995-$1795 for lender closing costs and their own legal fees in order to set up a reverse mortgage. You can learn more about the setup costs of a reverse mortgage by reading our Guide to Reverse Mortgage Costs