Pros and Cons of Reverse Mortgages

Are you considering a reverse mortgage? Here are some of the pros and cons.

Pro: You Can Get the Money You Need Without Selling Your Beloved Home

The challenge as a senior on a fixed income is that you can have a home that’s worth $2 million, but unless you have the income to qualify for a mortgage, you may qualify to borrow very little of it. That’s where a reverse mortgage can come in handy.

Unlike a traditional mortgage, a reverse mortgage doesn’t look at your household income. It instead looks at other factors, including your age and property’s value. You can borrow the money that you need regardless of household income.

This is helpful, as the only other way to withdraw sufficient equity from your home might be to sell it, which is probably the last thing you want to do.

Con: Interest Rates on Reverse Mortgages tend to be Higher

As there’s a higher level of risk for the lender, coupled with fewer lenders offering reverse mortgages, the interest rates on reverse mortgage are almost always higher than traditional mortgages and HELOCs. This means that when you pass away or go to sell your home, there may be very little equity left at that point. If you were hoping to gift funds to adult children, there may be very little to gift them then as well.

Pro: No Regular Payments to Make

Another downside of a traditional mortgage is that you must make regular payments. Not so with a reverse mortgage. With a reverse mortgage you don’t have to make any payments at all. This can be very helpful if you’re a cash strapped senior struggling with cash flow. The fact that you don’t have to make any payments while you live in the home can help make your financial situation that much easier.

Con: The Reverse Mortgage Lender Has to Be Paid in Full

The downside of a reverse mortgage is that the lender must be paid in full, regardless of your home’s value. When you pass away, it could be at a time when home values are down. If that’s the case, there may not be enough money to cover the debt owing. That means that your estate might have to pay the money owing to the lender. And there usually isn’t much wiggle room. Your estate can be expected to pay the amount owing soon after you pass away.

Pro: Tax-Free Withdrawal of Funds

Unlike withdrawing money from your RRSP, withdrawing money from your home is tax-free money. That’s right, you don’t have to pay any tax on the funds, as it’s equity from your primary residence and primary residences are tax-free in Canada. This can really help, as the money you receive is the money you’ll get. You won’t have to pay a withholding tax of 30% the amount before the money hits your bank account, helping your cash flow situation further.

Because of it, it doesn’t affect means tested government benefits like OAS and GIS either.

Con: Reducing the Equity in Your Home

The equity that you’ve worked so hard to accumulate over the years can go down a lot faster with a reverse mortgage. That’s because of the higher interest rates. That means that you can end up with a lot less equity than you would have imagined.

That’s why it’s worthwhile to investigate other options, such as traditional mortgages and HELOCs before taking out a reverse mortgage. Once you’ve exhausted all those options, only then should you consider a reverse mortgage.

Are you looking to borrow equity from your home? You have two main traditional options: home equity loans and HELOCs. Click here to learn how they both work!

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.