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June 2, 2016
After years of working hard, Brett and Elizabeth are retired and enjoying life in the home they paid off years ago. Unfortunately, their roof is starting to show signs that it needs major work. And their retirement savings just won’t stretch to cover such a costly repair.
A reverse mortgage is an important option available to them. It would not only solve their problem, they would also continue to maintain control over their major assets: their house and their retirement savings.
What is a reverse mortgage?
Specifically designed for homeowners over the age of 55 like both Brett and Elizabeth, a reverse mortgage is a financial vehicle that allows you to tap into the value of your home without having to sell it.
HomEquity Bank is the main supplier of reverse mortgages (also called Canadian Home Income Plan, or CHIP) in Canada. To assess whether, and how large, a reverse mortgage you qualify for, they assess your house’s market value and location, as well as your age and life expectancy.
Essentially you can “loan” the lender a maximum of 55% of the value of your house. The lender charges interest on that loan, and takes it out of your house’s equity.
You arrange how you will receive the money. The money can be sent as a lump sum, or over time.
A reverse mortgage is appealing to people like Brett and Elizabeth because, unlike other loans, it is a tax-free source of income that they can receive without making monthly payments. It also means they do not have to sell or move out of their house, and can still access the equity they built in it.
The amount they owe will never exceed the value of their property, and will not be due until they decide to sell their house, or until they have both passed. At that point, the lender recovers the money it paid them, plus interest, through the sale of the house.
In order to obtain a reverse mortgage, Brett and Elizabeth will have to pay significant upfront costs: an appraisal, independent legal advice, and the application fee. They could also face a penalty if they both pass or sell their house within three years of taking out the reverse mortgage.
Furthermore, reverse mortgages have much higher interest rates than regular mortgages. Because they can not make monthly payments against the loan, that high interest compounds over time.
Before taking out a reverse mortgage, consider the pros and cons, as well as how all the numbers would work out in your particular circumstances. This would include finding out the specific fees and penalties you would incur, and all of the details on repayment.
There are other ways for Brett and Elizabeth to fix their roof. They could take out a line of credit, buy a regular mortgage, rent out part of their house, or sell their house to a third party with a clause allowing them to continue living there. It could even be time for them to sell and downsize.
No matter what they decide, Brett and Elizabeth must consider all their options and get the right advice for them. For qualified mortgage advice and to learn more about the options available to you, contact SafeBridge today.
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