Ok let’s be real, you are probably tired of hearing about mortgage rates going up and what the options are for you when you purchase a home. It can look daunting and it can lead people to seek extra income sources or go for a lower valued house then they were originally looking for.
For some who are homeowners but have seen there bank account and average wage take a hit for various reasons in the past 2 years, such as because of inflation, loss of permanent income, stock dips, etc..
This brings us to today’s topic; Reverse Mortgages.
Recently, Reverse Mortgages have started to boom as people are liquidity strapped and need something to help supplement their income and help them get through the day-to-day tasks with less financial stress.
What is a Reverse Mortgage?
A natural mortgage is a type of loan that is used to buy property and/or secure monies, whether is be for a home, business or other property projects. A mortgage is usually much greater than other loans, such as a car or a personal loan, and can be paid back over a long period of time. Usually mortgage payments are made monthly and include part of the payment towards the principal of the property and part of it towards the interest.
A Reverse Mortgage is the exact opposite. If you already own a house, live in it, and own all or a significant amount of the equity, then you could qualify for a Reverse Mortgage. A Reverse Mortgage, depending on the lender, can be up to a usual maximum of 55% of the appraisal value of your property.
Is there Catch?
Yes, reverse mortgages have 4 main requirements:
- You must be a homeowner living in the home for a minimum of six months of the year.
- You must have a minimum of 55% of the value of your mortgage paid off, but many lenders prefer upward of 80%.
- You must be 55 years of age or older.
- If more than one person is on the title of the property you must be registered as joint tenants and not tenants in common. The main difference between these two types of shared ownership is what happens to the property when one of the owners dies. If the property is joint tenants, the interest of a deceased owner automatically gets transferred to the remaining surviving owner. If it is tenants’ in common the deceased tenant’s property interest belongs to his or her estate
You are likely wondering if you need an income to qualify for the borrowed amount, but it is not required since no payments are required for a Reverse Mortgage until the homeowner(s) move or pass away. Keep in mind though that there is an appraisal cost (roughly $300), legal costs (roughly $1795), and an Independent Legal Advice cost ($600) on Reverse Mortgages.
How Popular have Reverse Mortgages Become?
HomeEquity Bank, the country’s largest reverse mortgage provider through its CHIP product, says demand was up 30% in 2022 compared to the previous year. In 2022, they say total reverse mortgage originations top $1 billion for the second year in a row, adding that a “key strength” of its strategy has been its broker distribution network.
Equitable Bank, another mainstream provider of reverse mortgages has also said it has seen roughly a 25-30% growth for reverse mortgages.
The reason for this popularity is because Canadians are looking at their homes to pay for retirement or allow them to be more financially able so that they can live out the rest of their life with less stress, and likely in the home they are currently in.
Is there a Catch?
Depends on if you thought they would be interest-free.
Reverse Mortgages are in fact not interest-free. You may even be surprised to learn that reverse mortgages are typically 1.5 to 2 percentage points higher than a traditional mortgage. At these current rates, interest rates for reverse mortgages are averaging between 7-9%. That figure can significantly deplete a portion of the equity in the property causing future concerns.
The interest is not needed to be paid until the recipient either moves or passes away. If the recipient expected to have the equity available for others upon passing it is something to consider and remember.
Reverse mortgages can be a nice option if you are looking for a solution to your financial issues but still want to be able to live your retirement years in the comfort of your own home.
Reverse mortgages are becoming more wildly understand and we anticipate growth in this sector in the upcoming future and with that growth we may see changes to how they are structured, likely in the benefit of the homeowner.
Is a Reverse Mortgage something that you may be interested in? Give us a call or email at any point and we would be so happy to assist you in that process!