There is much hype in relation to reverse mortgages, also known as CHIP (Canadian Home Income Plan) mortgages, these days given the aging population and the low interest rate. This type of mortgage may be an excellent choice for some people. A reverse mortgage, however, is not for everyone. There are pros and cons and your options should be carefully considered as any real estate transaction should be.
To be eligible, the homeowners must be over 55 years of age and must live at the residence.
A reverse mortgage is a loan from a financial institution, so it is not a gift or a grant. There is nothing free about a reverse mortgage.
The whole of the principal sum and interest is due and payable when:
- The house is sold;
- You move out; or
- You die (you or the last to die if the house is owned by 2 people).
You also have the option to pay out the mortgage at your convenience by paying out the principal, interest, discharge fees, and applicable penalties.
It is of note that the interest on a reverse mortgage is typically higher than the interest on a conventional mortgage. An appraisal report will be also be required and be a cost that you as the borrower will bare. In addition, you will pay the lender’s legal fees together with your lawyer’s fees for providing you with independent legal advice for the transaction.
These up-front costs are all deducted from the mortgage proceeds.
Pros & Cons
- No regular mortgage payments;
- The mortgage proceeds are tax-free;
- You retain ownership of your home; and
- You can use the money as you see fit.
- Higher interest rate than a conventional mortgage;
- Your beneficiaries on death will receive a smaller inheritance due to repayment of mortgage; and
- Costs to set up the mortgage
Reverse mortgages make a lot of sense for seniors who have a lot of equity in their homes but have insufficient funds to enjoy their senior years. This type of loan puts money in their hands without an obligation to make regular payments. However, the piper will eventually get paid when the house sells or the owner(s) dies.
If you have questions about Reverse Mortgages and how it might impact you, please contact us..