Aging Canadian’s in need of a financial boost are cashing in record numbers, according to data released earlier this month. A report released by the parent company of HomEquity Bank, the nation’s sole provider of reverse mortgages, states that a record number of reverse mortgages (with a rough total worth of $67.2 million) were closed in the fourth quater of 2011.
Reserve mortgages are becoming increasingly popular among the nation’s elderly, especially those who have failed to save enough to fund a comfortable retirement. Reverse mortgages allow seniors to borrow up to 50% of the appraised value of their home; principal repayment (along with interest) is not collected until the home is sold.
Is a reverse mortgage right for you? It could be, especially if you’re house-rich but cash-poor. The following is a full analysis of the pros, cons and alternatives to Canada’s newest mortgage craze.
The Benefits of a Reverse Mortgage
The biggest selling point of a reverse mortgage is the lack of principal payments and interest charges. Seniors can tap the equity of their property today without any fear of immediate financial commitments. Another benefit is that the homeowner only has to pay back the fair market value of the home. This means there’s no risk of defaulting or having to max out a savings account in order to cover the loan.
The homeowner can stay in the home as long as they want once they’ve withdrawn a reverse mortgage (statistics from HomEquity show that most stay between eight and 12 years). What’s more, homeowners have the option of paying off their interest annually in order to better maintain their budget. This will also qualify the borrower for a half-point reduction following the year’s interest rate.
The Drawbacks
The main problem with reverse mortgages is high interest rates. A fixed, five-year reverse mortgage could run you close to 5.9% while a similar conventional mortgage costs just 3.5%. Interest rates on reverse mortgages are also compounded, sometimes at a semi-anual rate. Granted, you don’t have to pay that rate now, but you will eventually. When you die or sell your home, that money must be repaid, leaving less money for your estate or to help cover your expenses.
Homeowners will also need to foot the bill for a home appraisal before they can apply for a reverse mortgage. This can run between $175 and $400. Independent legal advice is also recommended, costing an additional $400 to $600. Finally, don’t forget about closing and administrative costs, which can sometimes add up to as much as $1,500.
Penalties for Early Payments
As strange as it may seem, there are also penalties for homeowners who wish to pay back their mortgage before the term is over. Death is the only way to avoid this penalty (the fees are reduced slightly if the homeowner is required to move to an assisted-living facility). Finally, reverse mortgages are required to rank first on the home’s title. This means that any other debts secured on the property must be retired using the proceeds from the reverse mortgage, or moved to a second postion.
Alternatives to Consider
Reverse mortgages aren’t the only option for elderly Canadians. A secured line of credit often provides lower borrowing costs as well as greater flexibility. Downsizing is another alternative. Selling your home will free up extra cash to help cover living expenses or improve your investment portfolio.
For some, moving isn’t an option. The memories and emotions that are tied to a family home are hard to walk away from. In cases like these, a reverse mortgage provides elderly homeowners with the most precious of commodities: time. Another decade in the family home can do wonders for the emotional and mental health of an elderly relative.
For more information on reverse mortgages, check out this informative article on FamilyLending.ca.