Alternatives To A Reverse Mortgage

Before I examine the alternatives to a reverse mortgage, I should reveal that I think a reverse mortgage is a fantastic product, especially in today’s age where many people find themselves to be ‘house rich’ but ‘cash poor’.

But do I think it the best solution for absolutely everyone?  Of course not.

Are there alternatives out there?  Yes.

Are the alternatives any good?  Let’s take a look…

So today I thought I’d examine some of the alternatives that you should consider while making your decision.

1. A Home Equity Line Of Credit (HELOC)

I would start with this as it is without a doubt the alternative option that we hear from the most.

A home equity line of credit is essentially a ‘revolving’ loan which you can dip into at any time.

For example, let’s say the lender gives you a HELOC of $50,000.

You can take as much or as little of the $50,000 as you like.  If you take out $0, you pay $0 in interest.  But any amounts you do take out are subject to interest.

The most obvious benefit of this product is flexibility – you can take out as little as you like and pay back as much as you want, when you want.

You can pay back 100% of what you took out and minimize the amount of interest you will pay.

Product Comparisons

We have already actually written a detailed article about how you can combine the best of both products into a Reverse Mortgage Line Of Credit.

In addition to this, I will take a look at the differences between this and a Home Equity Line Of Credit:

1. – A HELOC is more flexible – as I mentioned above you can put money in and take it out at will. You can pay off the entire loan with no penalty whenever you like – unlike a reverse mortgage, where penalties apply in the first 5 years of the loan.
2. – Another advantage is that rates for a HELOC are generally at slightly lower rates. So you save a little on the interest rate.
3. – However, a HELOC requires monthly interest payments of the minimum amount. No payments are required for a reverse mortgage.
4. – In addition to this, a HELOC is still a conventional loan that you need to qualify for (your income and credit score will be assessed as part of this). This is not the case with a reverse mortgage.
5. – Finally, a HELOC could ultimately lead to you losing your home if you don’t keep up with payments. This is also not the case with a reverse mortgage, as no payments are required so you can never lose your home.  Ever.

Who Is This A Good Alternative For?

This is the best alternative for those who are just needing short-term cash or to have access to a ‘rainy day fund’.

The reason is because of it’s flexibility – since you only need it for a short-term or emergency basis, you can dip in and out of it when you like.

If you have enough regular income and are not struggling, this might suit you; for those who need the cash for longer-term purposes, a reverse mortgage might be a better solution.

2. Sell Your Home

Easily the 2^nd most common alternative is selling your home.

Like a HELOC, we often have clients who are considering this as another option.

This one doesn’t need much explanation and is hard for us to advise you on.  However, there are some considerations that you need to make:

1. – Where are you going to live and what will the cost of this be?
2. – How does this cost compare to a reverse mortgage, HELOC or other alternatives (see below)?
3. – Are you physically able to stay in your home and maintain it? This is a very common reason for seniors looking to move.
4. – Would moving out of your home make your life better or worse?
5. – How valuable is your home to you emotionally – not financially?

Product Comparison

Since selling your home isn’t really a financial product, you can’t really make an apples to apples comparison.

However, from a financial perspective, let me raise a few things to consider:

1. – Selling your home would see you ‘withdraw’ all the equity you currently have – where as a reverse mortgage could eat into that (in 99% of cases it does not).
2. – However, you also lose out on future appreciation of your home – it is itself an investment and you are selling that investment and giving up any future returns (house price gains). Often these house price gains are more than the reverse mortgage costs – so you are giving up a profitable investment asset.
3. – In addition to this, selling your home is not free and the going commission rate in most of Canada just now is around 5%. So you are giving away 5% of the value of your home off the bat – with no house price growth or anything to offset this loss.

Who Is This A Good Alternative For?

Sometimes people get to a stage where they aren’t physically able to maintain their home – so either downsizing into a condo or renting a condo can be a good idea.

In addition to this, there are a few people who aren’t emotionally attached to their home – or maybe even own 2^nd homes (which are not eligible for a reverse mortgage).  This would be a good alternative for them.

 

3. A Regular Mortgage (Or Mortgage Refinance)

The final – but least considered alternative – is a ‘regular’ or traditional mortgage.

Included in this would be a mortgage refinance – where you increase the amount of the mortgage and take out some more equity.

The reason why so few of our clients consider this is that some of them already hold a regular mortgage on their home and they are looking to get rid of it – not consider it as an alternative!

Others spent years paying off the mortgage and the thought of putting it back on there and having to make those monthly payments again sends shivers down their spine.

However, for those who do not have a mortgage already, it is another way to get equity out of your home.

Product Comparison

Many of the points above – regarding a HELOC – apply for a conventional mortgage.

However, it is not quite as flexible as a HELOC.  There are a few other considerations for this too:

1. – With regards to rate, assuming you have reasonable income and a good credit score, this is going to be the lowest interest rate out of any of the alternatives – lower than both a HELOC and reverse mortgage.
2. – The other features of the mortgage are going to be very similar – penalties for early payment and restrictions about how much of the balance you can pay off though.
3. – However, this is probably the least flexible of the 3 options. In addition to this, you will be required to make monthly payments and you also need to qualify for it (like a HELOC).
4. – A mortgage refinance is also capped to 80% of the property value by law.
5. – Finally, you could lose your home for not keeping up with payments – unlike a reverse mortgage where you are secured from losing your home by the legal contract.

Who Is This A Good Alternative For?

The catch with a conventional mortgage is that the people who it is a good alternative for don’t really need it!

That is, if you have steady income, a good credit rating and a low mortgage balance (or zero mortgage balance) then this is a good alternative for you – except that you probably don’t actually need the cash.

The most likely candidate for this is someone who can simply go through a mortgage refinance and take more money out of their home, increasing their mortgage balance in the process.

Of course, this means higher monthly mortgage payments and paying more interest on your mortgage anyway – but for some people this is not a problem and a good alternative.

In Summary – Reverse Mortgage Alternatives

In this article we summarized the 3 most common alternatives that people consider.  For a more information on the product itself – please download our free guide.

In addition to this, it is also worth considering the difference in costs between these products – something we talk about in more detail in our article reverse mortgage costs and fees.

Did we miss anything?  If that’s the case, and there is an alternative to a reverse mortgage that you are considering, leave a comment below and we’ll give you a response.

 

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Pros And Cons Of A Reverse Mortgage

In  this article we thought we would outline the real pros and cons of a reverse mortgage.

Like any financial decision, there are both advantages and disadvantages that need to be considered.

As the reverse mortgage Canada specialists – we believe in objectively showing you both the advantages and the disadvantages of a reverse mortgage – so you can rest assured that the decision is absolutely the best one for you.

You want to make your decision while being informed and educated about all the facts.

So in this latest article, we’d like to take a look at both the major pros and the cons of a reverse mortgage in Canada.

PROS:

1. You Own Your Home For Life.  Period.  No Exceptions.

By far the biggest advantage of this mortgage product is that it allows you to get money out of your home with absolutely zero risk that you’ll ever lose ownership of your home.

This product – unlike what some people believe – is designed to keep you in your home for life.

Unlike a ‘normal’ mortgage, home equity loan or a home equity line of credit – you are guaranteed to keep ownership of your home for life and the lender cannot take it away for any reason whatsoever.  This is actually written into the legal agreement in black and white. 

This is because no repayments are required – failing to make repayments is the major reason that mortgage or home equity lenders risk losing their home.

 

2.  Freedom And Flexibility

Increasingly in Canada, the majority of savings one has upon retirement are tied up in property.

With property prices being so high, this type of mortgage allows you to take advantage of this and get some of the equity back out of your home.

The money you take out can be spent on anything you like – you have the complete freedom and flexibility to decide.  You’ve worked hard your entire life – now is the time to reap the benefits, live worry-free and free of debts or stress.

You don’t have to make any payments (although you can voluntarily make some if you like!) and there are no rules or requirements on how you spend the money.  This is as it should be – you invested into your home over the years and you should now reap the benefits – turning it into a ‘home pension’ by taking out a reverse mortgage is one way to do this.

 

3.  100% Tax Free

The money you receive – regardless of how you choose to receive it – is tax-free since it is technically a loan and not income.

Unlike pension withdrawals or other forms of retirement funds, it is not taxed at all.  Not one penny.

 

4.  No Re-Payments Required

The whole purpose of this loan is financial freedom – not loading you with more debts that you need to worry about paying!

 

Through conservative lending and not lending over a certain value of your home (55% maximum), it is possible to maintain the equity in your home without requiring you to make any repayments – home valuation growth can offset the loss of equity instead.

 

5.  Safety If The Housing Market Declines

Even if there was a massive housing crash, you will never owe more than what your house is worth at sale – guaranteed. Even when things such as Brexit occur, we are there to help you.

 

This is written into the contract.  So you are protected against any future potential housing shocks.  You don’t need to worry about what’s going to happen with the housing market in Canada.

And, best of all, 99% of reverse mortgages in Canada have equity remaining when the mortgage is removed.  The other 1% is capped to what the home is worth – it can never be above this.

So you also don’t need to worry about leaving a bill behind for your family.

 

 

DISADVANTAGES OF A REVERSE MORTGAGE:

1.  Interest

The amount you receive is still liable to interest.  Although you will never have to make any re-payments, this could reduce the equity in your home over time – but only if interest rates are more than double your property value appreciation.

Interest rates are almost always higher than a ‘normal’ mortgage or Home Equity Line Of Credit (HELOC) but lower than a Line Of Credit (unsecured), Car Loan, Loan or Credit Card rate by quite a bit.

The rates are low enough that growth in your home price should offset the interest – or in many cases just now, you can actually still see your home equity grow – even with a reverse mortgage on your home.

However, you need to factor this in and decide if the rate is worth paying for all the features and benefits (listed above).  For more on this, see our article on interest rates and penalties:

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2.  Moving Home Is Harder

The whole purpose of this product is to help you stay in your home.

 

So if you were thinking about maybe moving to another residence in future, it’s a little more difficult as you’d have to close out the mortgage first.

Of course you can just pay off the mortgage with the proceeds from the sale of your home (as we noted above, you can never owe more than what your home is worth at sale).  However, it does add a little more complexity to the decision to move home.

It should be noted that the same applies to any type of mortgage or loan secured on your home.  A ‘normal’ mortgage or Home Equity Line Of Credit would have the exact same disadvantage.

 

3. You Might Not Be Eligible

While you do not need good income or an excellent credit score – which you would need for most mortgage products, there are some restrictions on eligibility.

All property owners listed on title must be over 55 and your age(s) will determine how much money you are eligible for – in general, the closer you are to 55 the less you are eligible for.

This is because of how conservative the lending is.  If they were not as conservative, people would see their home equity being eaten up – so these rules are put in place to protect you and your home equity.

Furthermore, this product is only available on your primary residence – not any vacation or mobile homes.

 

4. Reduction Of Your Estate Size For Inheritance

Of course one of the disadvantages of a reverse mortgage (depending on your outlook) is that you are reducing the estate size available to your relatives for inheritance.  For this reason, you might consider speaking to any relatives or family members during the process of applying to ensure they are happy with everything.

The other thing to note is that you are only reducing your estate size if you actually use the all the money.

Of course, if you don’t actually use the money then your estate size stays the same – you have just moved some of the value of your estate out of your home and into your bank account – it is still in your estate just in a different format.

The actual impact on your estate size will then depend on how much of the money you use and the growth in your home prices vs the interest rate.  Some people (many people in Canada just now) are actually seeing their estate size increasing despite having a reverse mortgage on their property – this is because home price appreciation is offsetting both the interest rate and money being spent.

It would definitely not be prudent to rely on this happening though and factor in a reduction in estate size to your decision.

 

In Summary – The Pros And Cons Of A Reverse Mortgage

I hope the article above helps you decide if this is a great fit for you.

 

Sometimes you will have heard other rumours or ‘facts’ about the disadvantages of a reverse mortgage in Canada – mainly this is people confusing them with the American version of the product.

 

If you want more information, don’t forget to download a copy of our free guide to reverse mortgages in Canada.

The above information represents the real and true pros and cons of a reverse mortgage – if you have any other questions or concerns then feel free to leave a comment below and we’ll respond in due course.

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Canada Travel Tips

Canada is by size, the largest country in North America, second in the world overall (behind only Russia).  So what better way for our clients to spend their reverse mortgages Canada money than travelling all around this great country?  So we thought we’d outline some Canada travel tips.

Eminent worldwide for its immense, untouched scene, its mix of societies and multifaceted history, Canada is one of the world’s wealthiest nations and a noteworthy vacationer destination. Canada is land of vast distances and rich natural beauty. Economically and technologically,  and in numerous different ways Canada nearly takes after its neighbour toward the south, the United States, although there are significant differences between the two countries.

Tourism in Canada is one of the most prominent industries – for a very good reason, given the natural beauty of the country.

More the latest up to date information on Canada, make sure and check out the official travel Canada website.

Climate:

Trying to distil the climate of Canada into an easy-to-understand statement is impossible, given the vast area and diverse geography within the country. Overall, in most places, winters are harsh compared to much of the world, on par with northern Eurasia. The most populated region, southern Ontario, has a less severe climate, similar to the bordering regions of the midwestern and northeastern United States. Iqaluit, the capital of Nunavut, is just south of the Arctic Circle and remains very cold except for the months of July and August, when the July average maximum is only 12°C (54°F). On the other hand, the coastlines of British Columbia are very mild for their latitude, remaining above freezing for most of winter, yet they are not far away from some of the largest mountain glaciers found on the continent. Summers in the most populated parts of Canada are generally short and hot. Summer temperatures over 35°C (95°F) are not unusual in Southern Ontario, the southern Prairies and the southern Interior of B.C.

Canadian Regions:

Atlantic Provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island)

Quebec

Ontario

Prairies (Alberta, Manitoba, Saskatchewan)

British Columbia

The North (Northwest Territories, Nunavut, Yukon)

 

Language Spoken

English and French are the only two official languages in Canada. All communications and services provided from the federal government are available in both languages. Most Canadians are functionally monolingual, although some parts of the country have both English and French speakers. Over a quarter of Canadians are bilingual or multilingual. Many people in Montreal, Ottawa, and Quebec City are at least conversationally bilingual.

English is the dominant language in all provinces except Québec, where French is dominant and actively promoted as the main language. However, there are numerous francophone communities scattered around the country.

Canadian Cuisine

As noted at Canada travel, Canadian cuisine varies from region to region. Some specialties include maple syrup, Nanaimo bars (chocolate-topped no-bake squares with custard or vanilla butter filling and crumb base), butter tarts (tarts made with butter, sugar, and eggs), beaver tails (fried dough topped with icing sugar), fiddleheads (curled heads of young ferns), peameal bacon (a type of back bacon made from lean boneless pork loin, trimmed fine, wet cured, and rolled in cornmeal; eaten at breakfast with eggs or for lunch as a sandwich), and Halifax donairs (sliced beef meatloaf wrapped in pitas and garnished with onions, tomatoes, and a sweet condensed milk sauce).

 

Drinks

The drinking age in Canada varies from province to province. In Alberta, Manitoba and Quebec the age is 18, while in the rest of the provinces and territories it is 19. A peculiarity of many Canadian provinces is that liquor and beer can only be sold in licensed stores and this usually excludes supermarkets, corner stores, etc. In Ontario alcoholic beverages can only be sold in licensed restaurants and bars and “Liquor Control Board” (LCBO) stores that are run by the Province; although you can also buy wine in some supermarkets in a special area called the “Wine Rack”.Canadians are known for their love of beer, although wine and hard alcohol or spirits are also popular.

Like neighboring United States, some places in Canada are dry communities. Similarly, just like in the dry counties in the U.S., means that the sale of alcohol is either prohibited or restricted.

 

Hotels & Motels

Accommodations in Canada vary substantially in price depending on time and place. In most cities and many tourist areas, expect to pay upwards of $100 or more for a good hotel room. If inquiring always ask if taxes are included, because some offer it with taxes included, some not.

Hotels play an integral part of Canadian history, with some of the country’s most well known landmarks being hotels.

In rural areas, motels (short for “motor hotel”) are small, simple hotels where you might pay as little as $40-60 for a night’s accommodation (especially in the off season.) In many areas, a B&B (bed and breakfast) is a nice option. These are normally people’s homes with suites for guests. The price – anywhere from $45 a night to $140 a night – usually includes a breakfast of some kind in the morning.

 

Travelling

Wikitravel has the best guide to travelling across Canada – here is a quick summary:

By Car: Canada has a land border with only one country – the United States. See the “from the United States” subsection for more information on what to do when leaving the US.

You might also enter the country by road from the United States through one of many border crossing points. Obviously, the same rules will apply here, but if your case is not straightforward, expect to be delayed, as the officials here (especially in more rural areas) see fewer non-U.S. travelers than at the airports. Also expect delays during holiday periods, as border crossings can become clogged with traffic.

By Bus: Greyhound Canada serves many destinations in Canada, with connecting service to regional lines and U.S. Greyhound coaches. Be sure to inquire about discounts and travel packages that allow for frequent stops as you travel across Canada. Many routes connect major Canadian and American cities including Montreal – New York City and other big cities of Canada.

By Train: Travelling Via Rail is Canada’s national passenger rail service. Amtrak provides connecting rail service to Toronto from New York via Niagara Falls, Montreal from New York and Vancouver from Seattle via Bellingham. The train is an inexpensive way to get into Canada, with tickets starting from as low as US$43 return to Vancouver. There is also thruway service between Seattle and Vancouver.

 

 

 

 

 

 

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Retiring In Canada

This article is intended to help Americans who are considering retiring in Canada.

When searching for a place to retire you must know about yourself if you can adopt another language and feel at home with another culture. While retirement in Canada isn’t the least expensive alternative, it can be a strong decision for Americans hoping to extend dollars and live in comfort.

Here’s the reason why Money Sense named Canada as one of the best places to retire and why you ought to consider Canada for retirement:

Cost Of Living

The typical cost for basic items in Canada isn’t as low as what you find in creating nations. Be that as it may, it’s still lower than in the United States. As per a Deutsche Bank overview of worldwide costs, it costs 1.7% less to live in Canada.

Housing prices are additionally lower, as long as you remain out of the hot markets in Toronto and Vancouver. You can purchase a home on Prince Edward Island for somewhat more than $100,000. There are likewise reasonable rental costs in numerous areas of the country, particularly as long as the conversion standard stays ideal for the greenback.

Canadian Health Care

The Canadian health care system is much less expensive and it is affordable.

Prescription drugs are also much cheaper in Canada. As a retiree, human services will be one of your greatest expenses. Sparing cash on medicinal services alone can be a major motivation to resign in Canada. However, in order to take advantage of Canada’s high quality health care at affordable prices, you need to be at least a permanent resident of Canada.

You can apply for permanent resident status if you live in Canada for most of the year and can show that you are capable of supporting yourself. There’s generally no need to change citizenship if you manage to obtain permanent resident status.

Similarities With The U.S.A.

One of the biggest issues when retiring in a foreign country is culture shock. Taking your nest egg and retiring in an exotic and more affordable place, such as Thailand or Brazil, comes with its share of headaches. From foreign language barriers and cultural differences to lax banking systems and substandard technology infrastructure, adjustment can be very difficult for those used to living in the United States. Even in advanced countries such as England, where people speak the same language, Americans have to contend with the fact that motorists drive on the other side of the road.

Infrastructure in Canada

Living in Canada gives you access to the innovation and foundation you are utilized to in the United States. You will appreciate comparative mobile phone scope, internet services and different advantages you are accustomed to having. Similar advantages won’t be accessible in less developed countries.

Freedom And Flexibility

Canada has reliably beat out the United States as one of the “freest” countries on earth. The Fraser Organization’s human flexibility list puts Canada at number six, while the United States is 23rd. In the event that you are searching for security, and to have your rights regarded, Canada is a decent place to retire.

Canadian Taxes

As long as you are a U.S. citizen, you will be required to pay taxes – no matter where you live. However, the U.S. government does allow for foreign income exclusion. Make sure you pay attention to the regulations, and hire a good tax preparer or attorney to help you navigate the tax issues.

Canada can be an incredible place to spend your retirement summers and meet all requirements for some money related advantages that you won’t get by staying in the States. If you want to save money and have a great experience, Canada may be the place to retire.

 Make sure and read about the Canadian Pension Plan as well.  You can also read our article on Retiring in Canada.

Summary – Retiring In Canada

If you’re not a home owner a reverse mortgage in Canada might not be the best option for you but that doesn’t mean there are not great reasons to retire in Canada.

 

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Pensions In Canada

Pensions in Canada can be public, private and collective, or come from individual savings.  Of course, there is also the option to turn your home into a pension by taking out a reverse mortgage in Canada.

The Canada Pension Plan (CPP) forms the basic state pension system. All those employed aged 18 or older must contribute a portion of their income to a pension plan. In all provinces and territories except Quebec, these plans are administered by Employment and Social Development Canada, while Quebec administers them separately with the Quebec Pension Plan (QPP). Upon retiring, a contributor receives regular CPP pension payments equal to 25% of the earnings on which CPP contributions were made over the entire working life of a contributor from age 18 in constant dollars.  For more on this read about who is eligible for a pension in Canada.

Adjustments are made according to the Consumer Price Index. Although one can claim a CPP pension at age 60 rather than the typical retirement age of 65, as of 2016, those who claim it at 60 have their pension reduced by 36%.

Canada also maintains the Registered Retirement Savings Plan, which maintains personal accounts for holding savings and investment assets.

In addition to the public pension system, some employers maintain private pension plans for their employees. Investments into these plans are not subjected to taxation until retirement. Private pension plans are subjected to various regulations among the provinces and territories, and must be registered with the authorities.

Pension regulation in Canada

Pension regulation in Canada falls mostly within provincial jurisdiction by virtue of the property and civil rights power under the Constitution Act, 1867. For workers whose employers are subject to federal jurisdiction, such jurisdiction extends to regulating pension plans available to them.

Pension Benefits Act

The Pension Benefits Act is administered by the Superintendent of Financial Services appointed by the Financial Services Commission of Ontario. Ontario regulates approximately 8,350 employment pension plans, which comprise more than 40 per cent of all registered pension plans in Canada.

It was originally enacted as the Pension Benefits Act, 1965 (S.O. 1965, c. 96), and it was the first statute in any Canadian jurisdiction to regulate pension plans.

Overview:

All pension plans in the province must be registered with the Superintendent

A plan must have an administrator

The administrator has a statutory duty to exercise care, diligence and skill

The plan may be either defined benefit or defined contribution, and appropriate rules are in place to protect the benefits that have accordingly accrued to each member

Rules are in effect to determine the value of benefits that may be transferred or divided for family law purposes

The plan must have sufficient funding to provide the benefits that have been committed under it

Protections are in place in the event of the winding up of a plan, or the underfunding of a plan in the event of the employer’s insolvency

Transfers between plans cannot take place without the Superintendent’s authorization

A guarantee fund is in place for guaranteeing certain benefits provided by plans, and it is funded by all employers providing such plans.

CPP Investment Board

The CPP Investment Board, formally the Canada Pension Plan Investment Board, is a Canadian Crown corporation established by way of the 1997 Canada Pension Plan Investment Board Act, to oversee and invest the funds contributed to and held by the Canada Pension Plan (CPP). As of June 30, 2017, the CPP Investment Board manages over C$326 billion in investment assets for the Canada Pension Plan on behalf of 19 million Canadians.

Features of Pension Plan

Retirement pension
You can apply for and receive a full CPP retirement pension at age 65 or receive it as early as age 60 with a reduction, or as late as age 70 with an increase.

Post-retirement benefit
If you continue to work while receiving your CPP retirement pension, and are under age 70, you can continue to participate in the CPP. Your CPP contributions will go toward post-retirement benefits, which will increase your retirement income.

Disability benefits
If you become severely disabled to the extent that you cannot work at any job on a regular basis, you and your children may receive a monthly benefit.

Survivor’s pension
When you die, a pension may be paid to your surviving spouse

Death benefit
Provides a one-time payment to (or on behalf of) the estate of a deceased CPP contributor.

Children’s benefits
Provide monthly payments to the dependent children of disabled or deceased CPP contributors.

Provisions of CPP

The provisions of the CPP include:

Pension sharing
Married or common-law couples in an ongoing relationship may voluntarily share their CPP retirement pensions.

Credit splitting for divorced or separated couples
The CPP contributions you and your spouse or common-law partner made during the time you lived together can be equally divided after a divorce or separation.

Child rearing provision
If you stopped working or received lower earnings to raise your children, you may be able to use the “child-rearing provision” to increase your CPP benefits.

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Pros And Cons Of A Reverse Mortgage

In  this article we thought we would outline the real pros and cons of a reverse mortgage.

Like any financial decision, there are both advantages and disadvantages that need to be considered.

As the reverse mortgage Canada specialists – we believe in objectively showing you both the advantages and the disadvantages of a reverse mortgage – so you can rest assured that the decision is absolutely the best one for you.

You want to make your decision while being informed and educated about all the facts.

So in this latest article, we’d like to take a look at both the major pros and the cons of a reverse mortgage in Canada.

PROS:

1. You Own Your Home For Life.  Period.  No Exceptions.

By far the biggest advantage of this mortgage product is that it allows you to get money out of your home with absolutely zero risk that you’ll ever lose ownership of your home.

This product – unlike what some people believe – is designed to keep you in your home for life.

Unlike a ‘normal’ mortgage, home equity loan or a home equity line of credit – you are guaranteed to keep ownership of your home for life and the lender cannot take it away for any reason whatsoever.  This is actually written into the legal agreement in black and white. 

This is because no repayments are required – failing to make repayments is the major reason that mortgage or home equity lenders risk losing their home.

 

2.  Freedom And Flexibility

Increasingly in Canada, the majority of savings one has upon retirement are tied up in property.

With property prices being so high, this type of mortgage allows you to take advantage of this and get some of the equity back out of your home.

The money you take out can be spent on anything you like – you have the complete freedom and flexibility to decide.  You’ve worked hard your entire life – now is the time to reap the benefits, live worry-free and free of debts or stress.

You don’t have to make any payments (although you can voluntarily make some if you like!) and there are no rules or requirements on how you spend the money.  This is as it should be – you invested into your home over the years and you should now reap the benefits – turning it into a ‘home pension’ by taking out a reverse mortgage is one way to do this.

 

3.  100% Tax Free

The money you receive – regardless of how you choose to receive it – is tax-free since it is technically a loan and not income.

Unlike pension withdrawals or other forms of retirement funds, it is not taxed at all.  Not one penny.

 

4.  No Re-Payments Required

The whole purpose of this loan is financial freedom – not loading you with more debts that you need to worry about paying!

 

Through conservative lending and not lending over a certain value of your home (55% maximum), it is possible to maintain the equity in your home without requiring you to make any repayments – home valuation growth can offset the loss of equity instead.

 

5.  Safety If The Housing Market Declines

Even if there was a massive housing crash, you will never owe more than what your house is worth at sale – guaranteed. Even when things such as Brexit occur, we are there to help you.

 

This is written into the contract.  So you are protected against any future potential housing shocks.  You don’t need to worry about what’s going to happen with the housing market in Canada.

And, best of all, 99% of reverse mortgages in Canada have equity remaining when the mortgage is removed.  The other 1% is capped to what the home is worth – it can never be above this.

So you also don’t need to worry about leaving a bill behind for your family.

 

 

DISADVANTAGES OF A REVERSE MORTGAGE:

1.  Interest

The amount you receive is still liable to interest.  Although you will never have to make any re-payments, this could reduce the equity in your home over time – but only if interest rates are more than double your property value appreciation.

Interest rates are almost always higher than a ‘normal’ mortgage or Home Equity Line Of Credit (HELOC) but lower than a Line Of Credit (unsecured), Car Loan, Loan or Credit Card rate by quite a bit.

The rates are low enough that growth in your home price should offset the interest – or in many cases just now, you can actually still see your home equity grow – even with a reverse mortgage on your home.

However, you need to factor this in and decide if the rate is worth paying for all the features and benefits (listed above).  For more on this, see our article on interest rates and penalties:

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2.  Moving Home Is Harder

The whole purpose of this product is to help you stay in your home.

 

So if you were thinking about maybe moving to another residence in future, it’s a little more difficult as you’d have to close out the mortgage first.

Of course you can just pay off the mortgage with the proceeds from the sale of your home (as we noted above, you can never owe more than what your home is worth at sale).  However, it does add a little more complexity to the decision to move home.

It should be noted that the same applies to any type of mortgage or loan secured on your home.  A ‘normal’ mortgage or Home Equity Line Of Credit would have the exact same disadvantage.

 

3. You Might Not Be Eligible

While you do not need good income or an excellent credit score – which you would need for most mortgage products, there are some restrictions on eligibility.

All property owners listed on title must be over 55 and your age(s) will determine how much money you are eligible for – in general, the closer you are to 55 the less you are eligible for.

This is because of how conservative the lending is.  If they were not as conservative, people would see their home equity being eaten up – so these rules are put in place to protect you and your home equity.

Furthermore, this product is only available on your primary residence – not any vacation or mobile homes.

 

4. Reduction Of Your Estate Size For Inheritance

Of course one of the disadvantages of a reverse mortgage (depending on your outlook) is that you are reducing the estate size available to your relatives for inheritance.  For this reason, you might consider speaking to any relatives or family members during the process of applying to ensure they are happy with everything.

The other thing to note is that you are only reducing your estate size if you actually use the all the money.

Of course, if you don’t actually use the money then your estate size stays the same – you have just moved some of the value of your estate out of your home and into your bank account – it is still in your estate just in a different format.

The actual impact on your estate size will then depend on how much of the money you use and the growth in your home prices vs the interest rate.  Some people (many people in Canada just now) are actually seeing their estate size increasing despite having a reverse mortgage on their property – this is because home price appreciation is offsetting both the interest rate and money being spent.

It would definitely not be prudent to rely on this happening though and factor in a reduction in estate size to your decision.

 

In Summary – The Pros And Cons Of A Reverse Mortgage

I hope the article above helps you decide if this is a great fit for you.

 

Sometimes you will have heard other rumours or ‘facts’ about the disadvantages of a reverse mortgage in Canada – mainly this is people confusing them with the American version of the product.

 

If you want more information, don’t forget to download a copy of our free guide to reverse mortgages in Canada.

The above information represents the real and true pros and cons of a reverse mortgage – if you have any other questions or concerns then feel free to leave a comment below and we’ll respond in due course.

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Reverse Mortgage

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Costs And Fees For A Reverse Mortgage

Quite often we get asked the question about what hidden or buried costs there are in a reverse mortgage.

This is largely because the whole product can come across of having a feeling of being too good to be true.  Being sceptical like this is a good thing considering how many financial products out there bury their costs or have hidden fees that you don’t learn about until it is too late.

Today, in response to many of the queries on this, I thought I’d go through all the costs involved in setting this up.

That is, the initial costs before you do anything else.

This will include every single cost you need to know about – you can factor these into your decision.

The best way to think about reverse mortgage costs are to split them between costs that must be paid upfront (by you) and costs that deducted from the amount you borrow (you don’t actually pay these yourself):

1. Costs You Pay Upfront – Out Of Pocket Costs: $150-400

Let me first clarify what I mean by ‘out of pocket’.

This means that you have to pay these costs upfront and there is no other option or way to pay them.  The phrase – for those not familiar with it – comes from taking the cash out of your pocket and giving it to someone.

So what ‘out of pocket’ costs are there?

Well, the good news is that there is only one: the appraisal.

Appraisal costs will depend on where you are in Canada but you are talking about something in the range of $150-400 – with most coming close to the $300 range.

Why is an appraisal required?

Well you have to remember that the lender isn’t going to take any payments from you.  They are lending solely on the basis that they believe your home will continue to grow in value and that they’d like a share of that value.

This is from a lenders perspective – ownership of many homes across Canada.  So they absolutely must ensure that your home is a good investment for them.

So, this means that they must appraise your home.  A home appraiser is looking for 3 things:

• What is the house worth based on current market value?
• Any issues that they should be aware of that might impede future home value growth?
• The marketability of the home – that is how easy would it be to sell it (if they needed to) once the homeowners passed away?

Like anything, there is good news and bad news about this:

The good news?  This is the only upfront cost you actually have to pay (by cash or credit card).

The bad news?  This cost is payable even if you later decide not to take out the mortgage.  Unfortunately, there are no refunds on this.

What my suggestion would be is that if you have paid for an appraisal, but no longer wish to pursue this, that you try to use it to secure a ‘regular’ mortgage or Home Equity Line Of Credit – usually either of these will need an appraisal anyway (especially if you are refinancing).

2. Costs You Have To Pay But That Are Deducted From The Amount Borrowed

These costs – rather than being upfront costs that you have to pay out of your own pocket – can be deducted from the amount that you receive.

So lets say you arrange a reverse mortgage for $150,000 and these costs are $2,000.  Then you will receive $148,000 instead.

You can choose to pay them if you like but almost every single person chooses to have them deducted from the amount borrowed instead.

These are split between two different sets of legal costs:

a. Independent legal advice: $450-700

There are two aspects to legal fees that you are looking at:

• Legally registering the mortgage on title.  We will come to this in part b.
• Independent legal advice – unlike the above element, this is a requirement of the lender and is a very important one. It ensures that you don’t sign anything or feel like you were ‘pushed’ into this product without consulting an independent legal expert.

Like appraisals, legal fees vary across Canada and from lawyer to lawyer.  While $450 to $700 covers all ranges, generally they are around $600.

Remember: you don’t actually pay these upfront though – they are deducted from the amount you borrow.

b.  Legal, administrative and set-up costs: $1,495

These are with regards to the legal cost of registering of the mortgage on title.

Every single mortgage in the whole of Canada incurs this cost.

It is unavoidable – part of our mortgage laws.  Whether you are getting a Home Equity Line Of Credit (HELOC), ‘normal’ mortgage or reverse mortgage – you must pay a lawyer to register the mortgage on title – regardless of what type of mortgage you are getting.

A lot of people forget when they first bought a home that they incurred these costs and had to involve a lawyer – as a reverse mortgage is still technically a mortgage, a lawyer must be involved to place the mortgage on title.

Again – like independent legal advice – these costs are deducted from the amount that you receive.

In Summary – Reverse Mortgage Costs And Fees

That is it – there are no other fees or costs involved in setting up a reverse mortgage in Canada.

While the amounts can vary (it is really hard to predict what appraisals or lawyers will cost as they vary widely from province to province, city to city and lawyer to lawyer) –  these are all the costs at this point in time.

And remember, in terms of upfront costs that you actually have to pay in cash (or by credit  card) you are only talking around $150-400.

Here is a short table to summarize the costs/fees:

It should also be noted that costs and fees for setting up this are very similar to the alternatives out there.  For more on this, see this article we wrote:
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Most people are usually considering a Home Equity Line Of Credit – which comes with almost identical set-up costs (minus the administrative fee – although some lenders do charge set-up fees). See our article comparing this to a HELOC for more on this:

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As always, if you have any questions regarding reverse mortgage costs and fees then feel free to leave a comment below.

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Alternatives To A Reverse Mortgage

Before I examine the alternatives to a reverse mortgage, I should reveal that I think a reverse mortgage is a fantastic product, especially in today’s age where many people find themselves to be ‘house rich’ but ‘cash poor’.

But do I think it the best solution for absolutely everyone?  Of course not.

Are there alternatives out there?  Yes.

Are the alternatives any good?  Let’s take a look…

So today I thought I’d examine some of the alternatives that you should consider while making your decision.

1. A Home Equity Line Of Credit (HELOC)

I would start with this as it is without a doubt the alternative option that we hear from the most.

A home equity line of credit is essentially a ‘revolving’ loan which you can dip into at any time.

For example, let’s say the lender gives you a HELOC of $50,000.

You can take as much or as little of the $50,000 as you like.  If you take out $0, you pay $0 in interest.  But any amounts you do take out are subject to interest.

The most obvious benefit of this product is flexibility – you can take out as little as you like and pay back as much as you want, when you want.

You can pay back 100% of what you took out and minimize the amount of interest you will pay.

Product Comparisons

We have already actually written a detailed article about how you can combine the best of both products into a Reverse Mortgage Line Of Credit.

In addition to this, I will take a look at the differences between this and a Home Equity Line Of Credit:

1. – A HELOC is more flexible – as I mentioned above you can put money in and take it out at will. You can pay off the entire loan with no penalty whenever you like – unlike a reverse mortgage, where penalties apply in the first 5 years of the loan.
2. – Another advantage is that rates for a HELOC are generally at slightly lower rates. So you save a little on the interest rate.
3. – However, a HELOC requires monthly interest payments of the minimum amount. No payments are required for a reverse mortgage.
4. – In addition to this, a HELOC is still a conventional loan that you need to qualify for (your income and credit score will be assessed as part of this). This is not the case with a reverse mortgage.
5. – Finally, a HELOC could ultimately lead to you losing your home if you don’t keep up with payments. This is also not the case with a reverse mortgage, as no payments are required so you can never lose your home.  Ever.

Who Is This A Good Alternative For?

This is the best alternative for those who are just needing short-term cash or to have access to a ‘rainy day fund’.

The reason is because of it’s flexibility – since you only need it for a short-term or emergency basis, you can dip in and out of it when you like.

If you have enough regular income and are not struggling, this might suit you; for those who need the cash for longer-term purposes, a reverse mortgage might be a better solution.

2. Sell Your Home

Easily the 2^nd most common alternative is selling your home.

Like a HELOC, we often have clients who are considering this as another option.

This one doesn’t need much explanation and is hard for us to advise you on.  However, there are some considerations that you need to make:

1. – Where are you going to live and what will the cost of this be?
2. – How does this cost compare to a reverse mortgage, HELOC or other alternatives (see below)?
3. – Are you physically able to stay in your home and maintain it? This is a very common reason for seniors looking to move.
4. – Would moving out of your home make your life better or worse?
5. – How valuable is your home to you emotionally – not financially?

Product Comparison

Since selling your home isn’t really a financial product, you can’t really make an apples to apples comparison.

However, from a financial perspective, let me raise a few things to consider:

1. – Selling your home would see you ‘withdraw’ all the equity you currently have – where as a reverse mortgage could eat into that (in 99% of cases it does not).
2. – However, you also lose out on future appreciation of your home – it is itself an investment and you are selling that investment and giving up any future returns (house price gains). Often these house price gains are more than the reverse mortgage costs – so you are giving up a profitable investment asset.
3. – In addition to this, selling your home is not free and the going commission rate in most of Canada just now is around 5%. So you are giving away 5% of the value of your home off the bat – with no house price growth or anything to offset this loss.

Who Is This A Good Alternative For?

Sometimes people get to a stage where they aren’t physically able to maintain their home – so either downsizing into a condo or renting a condo can be a good idea.

In addition to this, there are a few people who aren’t emotionally attached to their home – or maybe even own 2^nd homes (which are not eligible for a reverse mortgage).  This would be a good alternative for them.

 

3. A Regular Mortgage (Or Mortgage Refinance)

The final – but least considered alternative – is a ‘regular’ or traditional mortgage.

Included in this would be a mortgage refinance – where you increase the amount of the mortgage and take out some more equity.

The reason why so few of our clients consider this is that some of them already hold a regular mortgage on their home and they are looking to get rid of it – not consider it as an alternative!

Others spent years paying off the mortgage and the thought of putting it back on there and having to make those monthly payments again sends shivers down their spine.

However, for those who do not have a mortgage already, it is another way to get equity out of your home.

Product Comparison

Many of the points above – regarding a HELOC – apply for a conventional mortgage.

However, it is not quite as flexible as a HELOC.  There are a few other considerations for this too:

1. – With regards to rate, assuming you have reasonable income and a good credit score, this is going to be the lowest interest rate out of any of the alternatives – lower than both a HELOC and reverse mortgage.
2. – The other features of the mortgage are going to be very similar – penalties for early payment and restrictions about how much of the balance you can pay off though.
3. – However, this is probably the least flexible of the 3 options. In addition to this, you will be required to make monthly payments and you also need to qualify for it (like a HELOC).
4. – A mortgage refinance is also capped to 80% of the property value by law.
5. – Finally, you could lose your home for not keeping up with payments – unlike a reverse mortgage where you are secured from losing your home by the legal contract.

Who Is This A Good Alternative For?

The catch with a conventional mortgage is that the people who it is a good alternative for don’t really need it!

That is, if you have steady income, a good credit rating and a low mortgage balance (or zero mortgage balance) then this is a good alternative for you – except that you probably don’t actually need the cash.

The most likely candidate for this is someone who can simply go through a mortgage refinance and take more money out of their home, increasing their mortgage balance in the process.

Of course, this means higher monthly mortgage payments and paying more interest on your mortgage anyway – but for some people this is not a problem and a good alternative.

In Summary – Reverse Mortgage Alternatives

In this article we summarized the 3 most common alternatives that people consider.  For a more information on the product itself – please download our free guide.

In addition to this, it is also worth considering the difference in costs between these products – something we talk about in more detail in our article reverse mortgage costs and fees.

Did we miss anything?  If that’s the case, and there is an alternative to a reverse mortgage that you are considering, leave a comment below and we’ll give you a response.

 

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Reverse Mortgage In Canada

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Retirement Activities – Things To Do In Your Retirement

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