Pros And Cons of a Reverse Mortgage


Pros And Cons of a Reverse Mortgage

Before making any decision that will affect your finances, it’s always good to go through a list of pros and cons you need to consider. It will help you get a better idea of what it’s all about, what you get from it, and what are the potential risks when getting into it.  

As experts in the field, we want to give you a reliable source of information where you can get checked facts about reverse mortgages that will help you come to a decision easier.

This is why I wrote a Complete Guide To Reverse Mortgages which you can download here.

That’s why in today’s article we’ve laid out the major advantages and disadvantages of a reverse mortgage in Canada. After reading, you should have all the necessary facts to make an informed decision and be absolutely sure you’re making the right choice. 

Pros of Reverse Mortgage 

You own your home and can live in it for life 

Unlike many other financial products, a reverse mortgage doesn’t put you under the risk of being left without ownership of your home. In fact, it’s the only type of loan that allows you to keep owning and living in your home for the entirety of your life. You won’t have to make any repayments unless you decide to sell the property or you pass away.  

You don’t have to make regular loan repayments 

Most financial products require regular repayment from the user, most often for long periods of time, which is not the case with a reverse mortgage. The whole goal of a reverse mortgage is to give you financial freedom, so you’re not obligated to make any type of payments, ever. All costs and fees tied to getting a reverse mortgage are either paid upfront or deducted from the borrowed amount later on.  

You don’t have to have any income or provide a credit report 

To be eligible to receive money, most financial products require you to provide an income, tax, or credit report to check your financial stability. This is not the case with a reverse mortgage. It’s tied to your home’s value, so the only thing that matters is the ownership over your home. 

You don’t have to repay the loan or interest until you sell the property or pass away 

You don’t have to provide regular monthly repayments, nor repay the loan or the interest when you have a reverse mortgage. Instead, the loan and the interest are repaid only when and if you sell the property or after you pass away. This means that you can live a financially flexible life without having to worry about reverse mortgage debt.  

You can leverage your equity  

A home is a most common and most valuable asset a person owns. However, throughout most of our lives, it just sits idly, without producing any income for us. A reverse mortgage allows you to change that. You can turn your home equity into cash for 55% of its value without having to sell it or risk losing it in the future.  

You don’t have to pay tax on the money you borrow 

Because a reverse mortgage is technically a loan, not an income, it can’t be taxed. So, unlike other types of income, the money you receive through your reverse mortgage can be used however you want in its full amount. 

You may have options as to when and how you receive the money 

When you get a reverse mortgage, you aren’t obligated to take all the money at once and at that same moment. You have the option of choosing whether you want to receive them as a lump sum or in a series of advances.   

Cons of Reverse Mortgage 

There are some eligibility requirements 

Even if you have a great credit score and a big source of income, you still wouldn’t be able to get a reverse mortgage if you don’t meet the basic conditions for it. The number one condition is that all owners registered on the title of the property have to be over 55. This means that even if you’re one of the owners, are over 55, and have an impeccable credit history, you wouldn’t be eligible for a reverse mortgage if the other owner/s are younger than 55. 

The second condition is that the reverse mortgage is only available for primary residences. You cannot get it for your vacation home, mobile home, or any other secondary property.  

Interest rates are higher than most other types of mortgages 

Although the interest rate getting a reverse mortgage is pretty affordable, it’s still higher than other types of mortgages such as the HELOC rates and the “normal” mortgage rates. However, if your property grows in value it can offset the interest costs, but you still need to decide if this benefit is worth paying a higher interest rate.  

Limited options to two providers 

Currently, the only two companies offering reverse mortgages are Home Equity Bank and Equitable Bank. This puts limits on your options, which is not the case with other loan types when you have 10+ providers with different sets of conditions you can choose from.   It also limits the rates available to you.

Higher start-up fees and costs 

As we discussed in our “Reverse Mortgage Costs and Fees” article, there are some costs involved with getting a reverse mortgage that can make it an expensive financing option. These costs can be anywhere between $2,000 and $3,000 which includes the appraisal, independent legal advice, and the registration and administrative fees. Although the exact amount can vary from person to person, there is no way of avoiding these costs, so they can turn out to be too high for some.  

Limits your financing options  

If you need any additional financing in the future, having a reverse mortgage might limit your options. After all, it’s a mortgage, so it affects your credit score and might make it more difficult getting another type of financing.  

Less money in your estate to leave to your successors 

As your estate repays the loan and the interest after you die, the value of your estate declines. This will leave your inheritors or beneficiaries with a property with lesser value than the one they maybe were expecting to receive. To avoid these types of misconceptions or inconveniences, you should consider talking to your family and relatives so they are aware of this.  

That is, of course, if you plan on spending the money you receive from the reverse mortgage. If you don’t use the money, you don’t actually reduce the value of your home but rather just move the value from the property to your bank account.  

Summary 

As with any other financial product out there, there are certain advantages and disadvantages in using a reverse mortgage. You may hear other rumors out there, but make sure to check the credibility of the sources where you got the information.  And make sure to check out the alternatives.

There are many misconceptions about it, so if you have any queries or concerns about it, reach out to us. We can help you paint a better picture of what a reverse mortgage is all about and how you can benefit from it.  

Free Reverse Mortgage Evaluation

I hope you enjoyed this article. If you’d like a free reverse mortgage evaluation, I’d be happy to help you.

With over 20 years experience in mortgages, I can look at your situation and advise you if this is a good fit – or if one of the thousands of other mortgage products I have through the 15+ lenders I work with might be better.

Simply fill out the short application form at:
https://www.goodadviceforabetterlife.ca/application-reverse/

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