First, a bit of background information on reverse mortgages. In order to qualify for a reverse mortgage, all borrowers must be at least 62 and the home must be your primary residence. Generally, there can be no other mortgage on the property. If there is another mortgage on the property, you will need to use some of the proceeds from the reverse mortgage to pay off the debt. A reverse mortgage, as it’s name implys, is a loan against the equity in your home. The most common type of reverse mortgage is a Canada Home Income Plan (CHIP).
The amount you can get depends primarily on your age, the value of your home, and the type of program you select. For example, an 85 year old living in a $500,000 home would qualify for a larger amount than a 64 year old living in a similar $500,000 home. To find out how much you could qualify for with a reverse mortgage, check out this calculator. Canadian limits for the CHIP Program are 40 % of appraised value.
Once you are approved, the loan amount can be disbursed in one lump sum, paid to you in monthly payments,established as an available credit line that can be tapped whenever you need it.
With reverse mortgages, you are never making any payments so your debt level is constantly increasing (because your equity is constantly decreasing). The good news is that you will never owe more on the loan than the house is worth. If property values drop after the loan is in place and you end up living a very long time, you might not have any equity left in the house but that would be the lender’s problem, not yours, and the lender wouldn’t be able to “evict” you because that situation occurred.
As long as you are living in the house and maintaining it properly, you do not have to pay back the loan. Reverse mortgages come “due” when:
- the borrower has died,
- the borrower sells the home, or
- the borrower has not lived in the home for one continuous year.
Technically, the lender can also demand payment if you:
- don’t maintain your home,
- don’t pay your taxes,
- don’t carry the necessary insurance, or
- declare bankruptcy.
I am really not a huge fan of reverse mortgages, as they tend to be very expensive. When you take out a reverse mortgage, you will incur origination fees, servicing fees, and closing costs. Total costs on a $250,000 loan amount could run close to $20,000. However, in certain situations, reverse mortgages are the only option on the table.
Manulife One has a credit line available for home owners that will advance up to 50 % of the appraised value without credit verification. You could establish a credit line at PRIME with manulife and advance (take only) the money you need when you need it. Simply put why borrow at 6.25 vs 4.15 % calculated in simple interest.
In just a few years, the costs associated with these products have come down and the terms in general will become more favourable. Baby boomers retiring in the next decadeso may find themselves short on retirement income but long on home equity so the demand for these products is likely to increase.
If you are interested to discuss these option please contact me and I will arrange for a Manulife One rep to make an appointment with you.