Do you know that you can get a loan against your house and on top of it convert it into tax-free cash? Also, you are not required to pay any kind of regular mortgage payments but yes if you sell your house or if you move out of your house you need to pay back the amount that you have borrowed. You will have to pay back the principal along with the interest at that time. This concept is known as a reverse mortgage which is quite prevalent in Canada. Wondering if you can apply for a reverse mortgage or if you are even eligible for that? Let’s find out in this article.
What is a Reverse Mortgage All About?
As mentioned earlier it is the kind of loan that you get against your house in other words you convert it in equity against your house and get money. Apart from reverse mortgages, it is also known as “equity release”.
In a reverse mortgage, you can get up to 55 percent of your existing house value. You only pay the due loan amount when you leave the house, sell it, or the last person borrowing the money dies.
One thing that you should know is that with a higher interest rate, you will have less equity in your own house. The maximum amount that you can get under this scheme depends on three major components.
- The lender
- Your age
- The appraisal value of your house
Eligibility Criteria for Getting a Reverse Mortgage
In order to be eligible to get a reverse mortgage, you need to be at least 55 years+ and need to have a house of your own. Also, you will require listing all the people that are in your house’s title to your application. In addition to that, all the people that are included need to be 55+.
There is one more thing that the lender may request you and your co-owners – to consult for legal advice and you will be required to give proof of that as well.
The lender will gauge your application on three major things.
- Where you reside
- The condition, the appraisal value, and the house type that you have
- Your age and the age of your house’s co-owners
A major requirement for a reverse mortgage is that you need to showcase that the house that you are getting a reverse mortgage on is your main residence aka the primary residence. This translates to the fact that you need to have resided in the same house for at least 6 months to a year.
The Cost of a Reverse Mortgage
The below-listed costs are associated with getting a reverse mortgage.
- The appraisal charges
- It attracts a higher rate of interest compared to a traditional mortgage
- Penalty charges in case you pay the loan before it is due
- Setup charges
- Legal charges concerning the closing cost
- Independent legal advice charges
You might have to pay the charges upfront or depending on the lender that you choose it can be included in the loan amount as well.
The Functionality of Reverse Mortgage
When you opt for a reverse mortgage, it limits the option that you can get for your house in terms of financing. If you want to get a reverse mortgage then you are required to pay back any kind of outstanding dues and Line of Credit that you have on your house. This also includes your mortgage and Home Equity Line of Credit aka HELOC.
You can get a lump sum amount or you can take an upfront amount and choose to get the rest of the amount over a period of time in a reverse mortgage system. It is advisable that you check out for the restriction applied by the lender and the loan terms before you finally make a decision.
Ways to Pay Back the Equity Release
As mentioned when you go for a reverse mortgage, you are not required to pay any monthly payments; you pay the entire principal amount along with the interest charge when the loan term ends. Though there are exceptions in which cases you will have to make the payment early which includes the following.
- The borrower dies
- You end up defaulting on the reverse mortgage
- you move out of a house or sell it
In general, people default on a reverse mortgage when they end up using money on gambling or any illegal activities or if their house value decreases over a period of time. Even not following the rules and regulations or being dishonest on your application can make you default on the loan.
Where Can You Get a Reverse Mortgage?
In Canada, HomeEquity Bank and Equitable Bank offer reverse mortgage facilities. The HomeEquity Bank provides the Canadian Home Income Plan (CHIP), which you can avail of from anywhere in Canada. The option includes getting the plan directly from the bank or going through a broker.
There are certain questions that you should ask a lender before you opt for a reverse mortgage. We have listed some offset important questions below.
- If there are any charges that you have to pay in addition to the mortgage
- The interest rate
- What if you default?
- How can and how much amount will you get?
- Penalties involved
- The time your estate would have to pay back the loan amount in case you die
- What if the estate fails to pay the amount within the saturated period?
- What if the house value increase leads to an increase in the loan amount at the time of paying dues?
The Bottom Line
Taking a reverse mortgage no doubt gives many benefits such as you would not have to make any regular loan payment, you do not pay any taxes on the amount borrowed, it doesn’t affect your OAS (Old-age Security Plan) or Guaranteed Income Supplement benefits, and you will still have the house under your name. But at the same time, you will end up paying the higher interest rate.
In case of the unfortunate demise, your estate will have to look after paying the rest of the amount and that can lead to having little money left for your family or kids. In addition to that. your equity in the house reduces as the loan and the interest amount increase. As a result, taking a reverse loan is a lot and you need to consider all the consequences before you make the final decision.