If you’re like many Canadians, chances are, the value of your home has grown over the years and makes up a good portion of your net worth. While having a home that has built value or equity is a positive, you typically can’t get access to the built up equity unless you sell your home. And that’s something many homeowners simply do not want to do.
With so much net worth tied up in their homes Canadians can be asset rich, but cash poor. Increasingly Canadian pensioners and retires do not have the income or cash to make ends meet or enjoy the lifestyle they desire. Reverse mortgages were specifically designed for older borrowers to provide access the equity in their homes.
How do reverse mortgages work?
As with a traditional mortgage, a reverse mortgage is secured by a first mortgage registered against the title of the borrower’s house. With a reverse mortgage you:
- Remain the owner of your home.
- You can sell the home or pay off the loan at any time.
- The amount you or your estate will have to repay will never be more than the fair market value of the home at the time of the sale.
- You can choose to make payments on the loan but no payments are required to be made.
If you decide not to make a monthly mortgage payment the interest for that amount is added to the loan balance and reduces the equity in your home. The term for this is that the interest is be capitalized or added to the loan balance.
The debt, including all the monies that were borrowed and any accumulated interest charges, is repaid to the lender when:
- The borrower sells the property of their own accord, OR
- The borrower moves out of the property, OR
- The last surviving borrower dies
How are the borrowed amounts paid?
The funds borrowed are paid to you tax free and can be paid as:
- a lump sum
- a regular income stream
- a line of credit for future use
- or any combination of all three
What can the money be used for?
- The monies can be used for anything you want but some of the more common uses are:
- Increasing monthly cash flow.
- Paying unexpected expenses.
- Paying off higher interest rate loans or debt.
- Home modifications to maintain independent living.
- Providing funds for home nursing care.
- Home repairs and upgrades.
- Provide funds for investments.
- Provide an early inheritance for children.