Retired homeowners can use the value of their home to supplement their income through the reverse mortgage.
Do the current real estate market conditions make this product more attractive?
No more than before. Here’s why.
A niche product
The reverse mortgage allows you to receive a certain amount of money based on the value of your home, while continuing to live there. The loan can reach 55% of this value, depending on the age of the owner, the condition of the building and where it is located.
The sum can be paid all at once or in the form of periodic payments. The borrower has nothing to repay and interest accumulates over time. It is not until the sale of the house that the loan must be paid.
The main flaw of this product: its high cost. Interest rates range from 4.5% to 6%, compared to a range of 2.45% to 2.95% for a home equity line of credit.
According to Ryan La Haye, broker at Planiprêt, the reverse mortgage is a solution of last resort.
“If we can get a line of credit, we prefer that option. If this is not possible, we will look to the owner’s other assets to see if there is anything else to do. If the income and assets are really insufficient, then we will consider the reverse mortgage, ”he explains.
Every year, dozens of clients knock on his house in an attempt to take out such a mortgage, but the solution is only appropriate for a small minority. “I sign two or three a year, no more,” he says.
The line of credit
Unless you’ve screwed up your credit report in recent years, you still have a good chance of getting a mortgage line.
Ideally, you should plan ahead and apply for this line of credit when signing the last term of your mortgage, when you are still generating working income. The owner then retains this credit capacity for as long as he keeps his house.
Otherwise, some institutions offer home equity lines of credit that specifically target the needs of retirees. These products allow you to borrow 40% to 50% of the value of their property.
One of the disadvantages of margin is often the obligation to pay interest on a monthly basis. But you can easily dip into the margin to cover the interest (yes, withdraw money and deposit it again afterwards). Some products, such as the “Manulife One” mortgage, automatically capitalize interest, which is added to the loan amount without the need for any customer transactions.
There is no reason to prefer the reverse mortgage over the cheaper and more flexible home equity line of credit. We consider it if we have no other choice.
- Two financial institutions offer reverse mortgages, HomeEquity Bank and Equitable Bank.
- The cost of borrowing with a reverse mortgage is high. Beware of advisers who offer to borrow the maximum of a cost in order to make that money grow. This type of maneuver is too risky. Opt for periodic payments, less costly in interest.
- According to Ryan The Hague, the commission paid to the representative on the sale of a reverse mortgage is 1.5% of the loan’s value, which pays him more than opening a home equity line of credit.
- The easiest solution is often to sell your house and move into a smaller, cheaper space.