Financing in “Reverse”
You’ve probably heard the term “reverse mortgage,” although you may not be entirely sure what it means, or if you’re eligible. Basically, the mortgage works in “reverse,” by allowing you to access the equity in your home. It has been designed for a demographic that is most likely to have considerable home equity-Canadians over the age of 60.
Imagine this scenario:
Rhoda and Percy own a home and have no mortgage. Pension income barely covers their month-to- month expenses and besides, they want to start “gifting” some of their estate to their grandchildren. Through a reverse mortgage, Rhoda and Percy can utilize up to 40% of their equity and have opted to take out a small lump sum payment followed by a monthly draw of $500. The good news is-these funds are not taxed as income!
Another benefit: you can choose how you would like to be paid. You can make small draws, receive monthly payments or request the entire amount be advanced to your account. The interest accrued is only applied to the amount drawn from the available funds.
No monthly payments required
No, this is not a typo-you are not required to make any payments on a reverse mortgage! Here’s why:
Dispelling Myth #1: You do not lose control of your home. The reverse mortgage is registered on title just like any other type of mortgage. The title stays in your name.
The interest is added to the balance and compounded semi-annually. The full loan amount, or portion used, is due when the home is sold, or if both owners move out. Clients do, however, have the option to pay off the principal and interest, in full, at any time. The best part is…
There is no income or health qualification!
Property values have declined across Canada recently, but over the long term a property should increase in value by approximately 4% annually. A reverse mortgage is structured in such a way that you typically cannot utilize more than 40% of the property’s value, and as a result, the equity in your home is inherently protected.
Qualifying is fairly simple: everyone on title must be over 60 years old and there must be available equity in the home (as determined by an independent appraiser). Financing can be arranged within two to three weeks via independent legal counsel.
A solution to many issues
There are no restrictions on how you can use the equity in your home through a reverse mortgage. Certainly, reverse mortgages are most commonly used to pay off debt. However, others use it to participate in investments through an investment broker or financial advisor. In the case of an investment, the reverse mortgage interest expense may be used to reduce taxes on investment income.
Consider this scenario:
Violet and Lloyd’s daughter is looking to purchase a new home. To help her out with a down payment, Violet and Lloyd were able to secure a reverse mortgage that would allow them to give their daughter $20,000; they are taking a further $50,000 out for home improvements.
Dispelling Myth #2: Unlike many other “equity take-out” mortgages, how you use the money is up to you. For example, the equity you receive can be used to:
o Purchase a vacation property
o Go on vacation
o Help a child with a down payment on a new home
There are many options available when it comes to reverse mortgages, including fixed or variable interest rates and different lengths of term. Reverse mortgages are available to homeowners across Canada and can be secured against two properties (one being a vacation property).
If you think you have a parent, friend or neighbor who could benefit from a reverse mortgage, talk to your friendly mortgage or financing professional. It’s certainly an excellent way of leveraging equity.