A reverse mortgage allows home owners to convert equity in their homes into cash, without selling the property or having to make monthly payments.
To qualify, home owners must be at least 62 years old, have significant equity in their property and live in Ontario. The amount that can be borrowed depends on the homeowner’s age. Reverse mortgages are for between 10% and 40% of the appraised value of the home. The older the home owners, the more they can borrow.
The homeowner retains ownership and possession of the house. The lending company registers a reverse mortgage against the property. At death, or when the house is sold, the loan and the accrued interest must be repaid.
The biggest disadvantage to reverse mortgages, is that the interest keeps building on the amount of money borrowed (hence the maximum 40% loan). This means that if you borrow $50,000 this year and your interest bill is $5,000, next year your interest will be charged on $55,000 and so on. The longer the loan is in place, the greater the interest bill that has to be paid.
It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off a loan. If the homeowner dies the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner’s heirs.
An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least interest possible, with no surprises.