What is a reverse mortgage
A reverse mortgage is a type of loan for homeowners, usually aged 55 or older. It allows you to borrow money from your home equity without selling your home. You may do so by converting a portion of your home equity into tax-free money. Financial institutions sometimes call this “equity release.”
You may usually borrow up to 55% of the current value of your home. This money doesn’t affect the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting.
The maximum amount you may borrow depends on:
- your age and the age of other individuals registered on the title of your home
- your home’s condition, type and appraised value
- your lender
To be eligible, the home you’re using to secure a reverse mortgage must usually be your primary residence. This typically means you live in the home for at least 6 months a year.
Costs of a reverse mortgage
The interest rate for a reverse mortgage is usually higher than the interest rate for a:
- mortgage
- home equity line of credit (HELOC)
Your lender adds your interest costs to your reverse mortgage. This means that the total amount you owe increases over time.
Other costs associated with a reverse mortgage may include:
- home appraisal fees
- set-up fees
- prepayment penalties if you pay off your reverse mortgage before it’s due
- legal fees
- closing costs
These costs may vary depending on your lender.
Your lender may add the fees to the balance of your reverse mortgage. You may have to pay for other fees up front. Ask your lender about the fees that apply to your reverse mortgage.
How you get your money from a reverse mortgage also impacts your costs.
You may get your money from a reverse mortgage as:
- a lump-sum for the entire amount
- a lump-sum for part of the reverse mortgage and the rest over time
- regular payments
Ask your lender how you may get your money from a reverse mortgage.
Lump-sum for the entire amount
With a lump-sum, you get the entire amount of the reverse mortgage. This means you pay interest on the full amount. If you don’t use the full amount right away, it may be an expensive way to borrow money.
Lump-sum for part of the reverse mortgage and the rest over time
Your lender may allow you to take part of the reverse mortgage up front and the rest over time. If that’s the case, your lender may require that you take out a minimum amount up front. This amount is typically around $25,000.
Each time you take out an additional amount, your lender may:
- charge a fee
- change the interest rate on the entire amount of your reverse mortgage
These costs may significantly increase the total cost of your reverse mortgage.
Regular payments
With regular payments, you get money from your reverse mortgage regularly. You typically get $1,000 each month or $3,000 every 3 months. With this option, your lender may require that you take out an initial amount. This amount is typically around $20,000.
Paying back your reverse mortgage
You don’t need to make any regular payments on a reverse mortgage. Your lender usually allows you to make payments up to a maximum amount. You usually also have the option to repay the principal and interest in full at any time.
If you pay off your reverse mortgage early, you may need to pay a fee. The term for repayment depends on the agreement you have with your lender. Ask your lender about the fees you need to pay if you pay your reverse mortgage early.
You need to repay the balance when:
- you sell your home
- you move out of your home
- the last borrower dies
- you default on the reverse mortgage
You and your estate usually have a limited time to pay back your reverse mortgage. Lenders establish their own policies about the timing for paying back the reverse mortgage. They also determine the consequences if you or your estate doesn’t pay it back on time.
Make sure you ask your lender for information about the timing for paying back a reverse mortgage.
Investment/Rental Property:
Buying rental property can be a great way to invest for the long term and generate monthly income.
Like any investment, research the pros and cons before making any decision and be clear on what your goals and risk appetite for owning rental property are. Here are some key questions and tips to keep in mind as you contemplate making a purchase.
What kind of property do you want?
- Most, first-time investment property buyers tend to start with condos and single-family homes, however multiplex units are generally more likely to be cashflow positive
- With property, bigger is not always better because it likely means more taxes and more space to maintain — and the incremental rental income you’ll receive may not cover your additional expenses.
What is an ideal location?
- To attract high quality tenants, look for a property close to schools, hospitals, public transportation, businesses, retail, etc.
- Focus on neighbourhoods where demand for rental properties is strong and expected to remain so for the immediate future.
How is the local rental/job market?
- The number of rental properties for sale in a neighbourhood can impact the price you’ll pay.
- A healthy and growing job market will likely spur demand for housing and may result in rising rental income.
- A growing area with major improvement projects planned (like a mixed-use retail residential development, subway stop or health clinic) could make the location more attractive to potential renters.
Does a purchase make financial sense?
- Investing in rental property should be considered a long-term investment that helps build capital.
- Consider whether your real estate investment has the potential to provide a better return when compared with other investments.
Get the advice of experts in Max Lend
- Assemble a team of professionals to advise you on real estate, legal, tax and financial decisions. Getting the right advice upfront could save you money in the long run.