Reverse Mortgage Loan Blog

My mother recently handed her business down to my sister and is enjoying retirement.

And while my mom and her husband have enough savings to support their lifestyle, their beautiful mortgage-free large house is becoming more expensive to keep up. However, they don’t want to downsize yet.

So, when she asked me about accessing some of the money from the value of her house through a reverse mortgage, I told her to tread carefully.

A reverse mortgage allows Canadians older than 60 years of age to retrieve some of the money they have invested in their home without selling it.

There are a number of ways you can access this cash. You can receive a lump sum, usually worth between 10 per cent and 40 per cent of the value of your home. You can receive the funds as a regular monthly payment. Or, you can set one up like an emergency fund, withdrawing what you need when you need it.

You (or your estate) pay back the money you have borrowed from your home’s value, plus interest, when you sell or upon death. Unlike a traditional mortgage, there are no monthly payments.

It sounds like a great way to generate income, doesn’t it? However, a reverse mortgage needs careful consideration. The interest rates are usually higher than normal mortgages and high set-up fees are required. The interest charged can grow quickly and in some cases even result in very little value remaining in the home when it is sold.

If that happens, there could be very little left to pay for long-term care if it’s needed. Or, the amount of money you are going to pass down to your kids could be impacted.

Seek professional financial advice about a reverse mortgage. Ask your adviser about the fees, how fast your debt will grow and if there are income-generating alternatives such as a line of credit.

A reverse mortgage may be a potential income-generating strategy for some retired Canadian homeowners but it is no substitute for a thought-out retirement plan.

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