Reverse mortgages allow senior citizens to borrow up to 100% of their property’s value in order to receive scheduled monthly payments or access lump-sum payments. The “reverse” part of the mortgage means a lender will make payments to the homeowner while the balance, interest and fees accumulate and will eventually need to be repaid.
Today, more and more lenders are offering reverse mortgage products since the demand for them has become more significant. Times have clearly changed, and life expectancies have increased, and this means the retired population will likely require additional sources of income after the age of 55.
According to Sunlife Assurance Company of Canada, programs such as the Canada Pension Plan and Old Age Security get funded out of general tax revenue, so, in theory, if there is a change in legislation or not enough Government funding to continue the programs, they could be eliminated.
Longer life spans also mean more employers are refusing to offer work pensions, and so, Canadians will need to plan wisely for retirement years.
Further, one of the largest financial threats to retirees is the sharp incline of Canadian debt levels. According to Stats Can, the average debt level is currently 174%, which means an individual is likely to owe $1.74 in credit, which is composed of mortgages, unsecured loans and car loans for every $1.00 they earn. Considering the upward trend of debt, it's all the more likely that fewer Canadians will retire debt-free and, therefore, should consider new ways of managing their monthly liabilities after retirement.
How are reverse mortgages administered?
Reverse mortgages are very different from the classic-type mortgage. When borrowers are buying a house and going through the mortgage qualification process, specific criteria must be met, such as employment verification, credit approval and loan serviceability. Once the mortgage is approved and registered against their property, the borrower will start to make mortgage payments towards paying off both the interest and the principal balance. Eventually, the borrower will pay off the entire mortgage loan over a specific amortization period. In this way, paying down mortgage debt is equivalent to a savings plan.
Reverse mortgages, on the other hand, are only suitable for retired individuals who have already paid off their mortgages, are mortgage-free or who have a considerable amount of equity in their property but have new concerns such as health, medical concerns and stability in house prices. Since older people may face more financial uncertainty, they may be more inclined to liquidate their real estate assets without officially selling.
Therefore, their need for alternative income sources to sustain the cost of living creates a satiable market for reverse mortgage products.
What are the benefits of a reverse mortgage?
The most considerable benefit is a homeowner's ability to stay in their home without having to downsize or join a retirement community. Additionally, there are various ways a reverse mortgage can be set up, including monthly installments, lump-sum payments and even as a line of credit. The apparent additional benefit would be that there is no loan payment required each month as long as the homeowner can pay their property taxes, insurance and maintenance expenses.
Also, unlike other sources of income, which may affect the amount or entitlement of certain allowable benefits, generally, a reverse mortgage will not affect their eligibility.
What are the disadvantages?
All qualified borrowers need to be aware of the disadvantages of a reverse mortgage. First, as monthly or lump sum payments get made, the mortgage balance increases along with fees and interest accumulation.
Sometimes, fees attached to reverse mortgages can be higher than conventional or classic loans, so its essential borrowers learn the details beforehand. A reverse mortgage also has a maturity date (Maturity Event) just like a regular mortgage and will become due and payable on a specific date. However, the maturity date would not be the same as one outlined in a conventional mortgage. It would be on the date a borrower passes away, for example, or the property is no longer the borrower's principal residence. This date is often referred to as the "Maturity Event."
Since there are many lenders who offer a reverse mortgage product, it's important that borrowers shop around and obtain different opinions. Fees and rates may differ among each financial institution and cost savings should be considered just like they would be in a conventional or classic mortgage loan process.
Sarah A. Colucci
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929