By Peter H. Cass
Disclaimer: This article is not a substitute for legal advice. No action in regard to your particular matter should be taken until you have first sought full legal or professional advice from a lawyer fully retained to act on your behalf.
What is a Reverse Mortgage?
According to the Government of Canada, a reverse mortgage is defined as follows:
“A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. This is sometimes called ‘equity release.’ You can borrow up to 55% of the current value of your home. The maximum amount you’re able to borrow will depends on: your age, your home’s appraised value, and your lender. You pay back your loan when you move out of your home, sell it or the last borrower dies. This means you don’t need to make any payments on a reverse mortgage until the loan is due. You will owe more interest on a reverse mortgage the longer you go without making payments. At the end of your loan term, you may have less equity in your home.”
Some Notes on my Experience with Reverse Mortgages
Reverse mortgages are a special financing option that can have appeal for certain clients, depending on their circumstances. The positives are that no payments are necessary until the house is being sold or the borrower has not been living in it for 12 months. In addition, the payments to the borrower are tax free.
However, there are some negatives to consider:
Once a borrower reaches the limit of the credit, there is no further money available.
The interest rate is reset from time to time and is usually higher than other types of debt that is secured against the borrower’s residence.
Because of the effect of compound interest, there is risk that if the value of the property stays the same or decreases, the borrower has much reduced equity over time.
Sources for reverse mortgages have, to my experience, been very careful about explaining to applicants both the positive and negative features. In a rising market, I have seen clients whose property has gone up way more than the accumulated interest.
In summary, for a borrower who has no other way to stay in their home, the reverse mortgage option can achieve their objectives, subject to the negative effects of compounding interest and loss of equity. On all of these types of loans, the lenders require that the borrower obtain full independent legal advice from a lawyer of their choosing, and we, of course, offer this service.
For more information or legal advice on reverse mortgages, contact Peter Cass, here.