Is a reverse mortgage for me?
A Reverse Mortgage is a financial product specifically designed for homeowners who are at least 55 years old. It allows them to convert a portion of their home equity into cash without the need to sell their home or make regular mortgage payments. Here are some key points to understand about reverse mortgages in Canada:
What does this all mean for you?
This is not free money, in fact it is rather expensive money. But maybe worth it in the end. It’s important to really look at the costs and the options.
Here’s a quick example, the numbers may not be exactly right…but they are close.
Imagine you borrowed $300,000 on January 1, 2023 on a 5 year term at 7.69%.
You would immediately pay an administrative fee of around $1,800 and an appraisal fee of about $750. This could be put on the mortgage. You would also pay legal fees of around $1,000 which would come out of your pocket.
One year later the amount you owe would be around $326,200, almost 9% more than you borrowed.
By the end of year 5 you would owe about $441,000…47% more than you borrowed.
If your home value increased by the long term average of 3% per year, your home would now be worth around $870,000, an increase of $120,000. Your equity would be around $330,00.
Assuming you keep your Reverse Mortgage going at the same interest rate, because you don’t have $441,000 to pay it off. By year 10 you will owe more than $640,000, more than double what you were paid. You will have accrued more than $340,000 in interest in the account. Your house, however, might be worth around $1,000,000.
My back of the envelope calculations tell me that Reverse Mortgages may be an option for those 75 and older who need a significant amount of money for some good reason. If you need money to meet day-to-day obligations there may be cheaper alternatives for you, like a Home Equity Line of Credit, where you only take the money as you need it…as long as you factor in monthly payments.
The major risk is that your home may not increase in value sufficient to cover what you owe at some point, so make sure that you get an experienced real estate lawyer who can lay this all out for you in advance.
I'm Steve Willson, a licensed Mortgage Agent with Mortgage Alliance. The opinions here are my own. Everyone's circumstances are different, so you should always consult a reputable professional to give you the best advice. You can reach me through my website: stevewillson.ca
You know I don't give mortgage advice, and Steve doesn't give real estate advice...so if my clients ask about reverse mortgages, he's my trusted source!