If you’re over 55 years of age, most Canadians over the age of 55 have two types of equity - the money you’ve saved and the equity of your home. There are pretty good chances that your home has grown in value over the years and makes up a good portion of your net worth. Even though your home might be worth more now than it was when you originally purchased it, you typically wouldn’t be able to spend that value unless you sold your home. Most homeowners don’t want to do this.
That is where a reverse mortgage comes in!
A reverse mortgage lets you change the home equity you have built up and turn it into cash. Unlike many other mortgages and mortgage products, you’re not obligated to make any payments until you choose to move or sell your home. The proceeds are tax free and the loan does not require any scheduled repayment.
To use a basic example, assume that you own a home worth $400,000 and that your lender advances you $100,000 on a reverse mortgage with a rate of 5.5%. Your annual interest cost (in simple terms) works out to $5,500, and this amount is added to your mortgage balance. So, at the end of the first year, assuming no change in the value of your property, your mortgage will increase to $105,500 and your equity will decrease to $294,500.
Homeowners (and spouses) must be at least fifty-five years of age and the maximum amount of home equity that can be withdrawn is set on a sliding scale according to age (55 yrs. = approx. 25%, 70 yrs. = approx. 40%, 80 yrs. = approx. 55%).
Reverse mortgages are available in most urban areas and offered on almost any property type (house, townhouse, condo, etc.), provided that the home being mortgaged is the borrower’s primary residence. These loans can be paid off at any time, however there are some strict penalties if you break the reverse mortgage in the first two years of your contract.