Introduction
I recently read an article that said seniors are taking on Canadian reverse mortgage debt in record numbers. In fact, this year, it is one of the fastest-growing debt products.
On April 30, 2018, I published Brandon’s Blog titled “CANADIAN REVERSE MORTGAGE INFORMATION: EASY TO LOSE THE HOUSE IF YOU DON’T UNDERSTAND THE TERMS”. That blog was about an Ontario court case. It showed how easy it is to lose your home to a reverse mortgage lender. Even easier than if you go into default on a traditional mortgage.
I doubt that many of the seniors using this type of debt to raise money fully understand all of the issues, including reverse mortgage problems. The purpose of this blog is to answer the most asked questions about this kind of debt.
How does a reverse mortgage work in Canada?
A http://www.irasmithinc.com/blog/what-happens-to-mortgage-when-you-die-canada/Canadian reverse mortgage is financing that permits anyone of the age of 55+ to obtain a loan from your home equity without having to sell your home. The loan is secured by way of a mortgage against your house. This is often called an “equity release”. You have the ability to get up to 55% of the present worth of your home. The actual percentage and dollar value you will have the ability to borrow depends on your age, your residence’s assessed value as well as the lending policies of your lender.
You do not need to make payments on a reverse home loan up until it is due for repayment. This is normally when you vacate your house, it is sold or the last borrower passes away. No payments do not mean the same as no interest. Interest accrues on a reverse home mortgage.
The longer the loan is outstanding, the more time you go without making payments. Therefore, the longer the interest accrues. This obviously reduces the equity in your house.
This is how this type of loan works.
What is the interest rate on a reverse mortgage in Canada?
The interest rate is but one cost of getting a reverse mortgage loan. At the time of writing this blog, the current annual interest rate on this type of loan is in the 5.5% to 5.7% range. This is obviously more than a traditional home mortgage today. This is obviously more than the interest rate on a traditional home mortgage today.
In order to set up such a loan, you will also need to pay for an appraisal fee and an administration fee. Right now that seems to be in the $1,500 to $1,800 range. You will also be responsible for the legal fees involved in preparing and registering the mortgage.
What is the downside of a Canadian reverse mortgage?
There are both advantages and disadvantages to this type of mortgage loan.
Advantages
- You don’t need to make monthly payments.
- You can turn some of the worth of your house into cash, without needing to sell it.
- There is no tax to pay as a result of getting the cash.
- This loan does not impact the Old-Age Security (OAS) or Guaranteed Income Supplement benefits seniors may receive.
- You still own and live in your home.
- You may have options as to when and how you get the money.
Disadvantages
- Rates of interest are more than traditional home mortgages.
- The equity you hold in your house will decrease as the interest on your home loan accumulates throughout the years. Depending on what happens to the market value of your home over the years, your home equity may decrease.
- Your estate will have to repay the loan with interest in full within a set time period when you die.
- The time needed to clear up an estate may be longer than the length of time permitted to repay a reverse home loan.
- There might be less money in your estate to entrust to your children or other beneficiaries.
- Expenses connected with a reverse home mortgage may be higher than a routine mortgage or other methods of financing.
Who offers reverse mortgages in Canada?
There are two lenders offering these loans in Canada: Canadian Home Income Plan (CHIP) and Seniors Money Canada. It is normal to go through a mortgage broker. However, HomeEquity Bank does also offer the CHIP product.
Why are seniors flocking to this type of debt?
A reverse home mortgage is not a new-fangled principle or invention. Actually, reverse mortgages have been around in Canada since 1983. But it’s just in recent times, as many senior citizens are desperate to find a means to fund their retired lives, that reverse home mortgages have become much more popular.
Financing one’s retirement has come to be progressively harder for many seniors. Pension plans are going away and also OAS and Canada Pension Plan (CPP) do not provide ample funds for today’s retirees. This is the main reason seniors have actually sought Canadian reverse home loans.
Many seniors with residences are house rich yet cash money poor. They’ve discovered that a reverse mortgage is a way to get the necessary cash to fund their retirement by using the equity in their home. As a retiree, they can no longer meet the income test to get traditional mortgage financing. So, the reverse mortgage solves that problem.
Senior Borrower Beware
I would be remiss if I did not provide a warning. A large proportion of reverse mortgages are arranged through mortgage brokers. Like any other financial professional, there are great ones, good ones, and not so good ones. Seniors are also more susceptible to scammers. So, it is always good for a senior to have a trusted advisor involved in the reverse mortgage loan process.
To start, there are some basic questions that every senior should ask BEFORE committing to a reverse mortgage loan. They are:
- What are all the fees involved with this borrowing?
- How the cash is actually paid to you?
- What is the annual rate of interest charged?
- Is there any type of extra charges if you sell your house within a certain period of time?
- Just how much time you or your estate will need to pay off the loan if you need to sell your home or die?
- What happens if it takes your estate longer than the specified amount of time to completely pay back the loan after your death?
- What occurs if the amount of the funding plus interest winds up being greater than your home’s worth when it’s time to pay the loan back?
- What are events of default?
- If I default on something, like not paying my property taxes on time, what happens?
- If such a default happens, will you lose your home?
- Are there any other terms of the loan agreement that you must know?
It is important that seniors know the answers to these questions before signing on the dotted line!
Summary
Do you have too much debt? Before you get to the stage where you can’t make ends meet and you have to borrow against the equity in your home, reach out to a licensed insolvency trustee (formerly called a bankruptcy trustee). In fact, if you realize that you can’t pay your debts heading into retirement, contact us.
We understand the pain and stress too much debt can cause. We can help you remove that pain and solve your financial problems given immediate action and the right plan.
Call Ira Smith Trustee & Receiver Inc. today. Make an appointment with one of the Ira Smith Team for a free, no-obligation consultation and you can be on your way to enjoying a carefree retirement in your home Starting Over, Starting Now. Give us a call today.
