Are your clients looking for innovative ways to fund their retirement? Do they want to tap into their home equity to fund a business venture? Are they looking for extra cash but reluctant to move out of their homes? In all these cases, reverse mortgages may be the answer. Here’s what you need to know to advise your clients.
What Is a Reverse Mortgage?
In the simplest sense, a reverse mortgage is when the bank slowly buys your client’s home. Your client gets to continue living in the home until they die or move out, and during that time, the bank sends your client monthly payments or extends them a line of credit. Essentially, this setup is the reverse of a traditional mortgage.
How Do You Qualify for a Reverse Mortgage?
To take out a reverse mortgage, a homeowner must be over the age of 55, and if the home is owned jointly, both owners must have had their 55th birthdays. The home also needs a significant amount of equity to qualify. Beyond equity, lenders take into account the borrower’s credit history as well as the location and condition of the home.
What Are the Benefits of a Reverse Mortgage?
The main benefit of a reverse mortgage is that homeowners can tap into their home’s equity without having to sell their home or move out. Borrowers don’t have to make regular monthly payments like they do with traditional mortgages or home equity lines of credit. Instead, the bank pays them.
If you have clients who receive Guaranteed Income Supplements, let them know the income from a reverse mortgage won’t affect this benefit. As an added bonus, the Canada Revenue Agency doesn’t consider reverse mortgage payments to be taxable income. That means your clients don’t have to worry about clawback of their Old Age Security payments. Clawback is when taxpayers earn over a certain threshold, and the CRA "claws back" some of their OAS payments.
What Are the Disadvantages to a Reverse Mortgage?
Unfortunately, the interest on reverse mortgages tends to be higher than traditional mortgages. Also, remember to remind your clients that if they take out a reverse mortgage, they probably won’t be able to pass their home down to their children. If your clients decide they want to keep their home in the family, they need to pay off the reverse mortgage. After their death, their estate can pay off the reverse mortgage, but this makes it longer to settle the estate.
What Are Alternatives to Reverse Mortgages?
Whether your clients need personal funds for a business or some extra money for regular living expenses, they may want to explore alternatives to reverse mortgages. One option is a home equity loan, which is an installment loan based on the equity in your client’s home. In contrast, a home equity line of credit is also based on home equity, but it works more like a credit card. With a line of credit, clients can use the funds at their own pace and make small monthly repayments.
Where Can You Get a Reverse Mortgage?
In Canada, there are two types of reverse mortgages. The Canadian Home Income Plan is available through HomEquity Bank and other mortgage brokers throughout the country. The PATH Home Plan is based in Alberta, British Columbia, and Ontario.
If your clients are curious about reverse mortgages, help them review the pros and cons. Then, crunch the numbers so they can see the long term effects. Finally, step back and let your clients make the final decision.