ith volatile markets, soaring inflation, and the hot housing market showing signs of slowing, a reverse mortgage may be looking more attractive to seniors who own their own homes. Many retirees and those thinking about retiring are sitting on home values in Ontario worth millions of dollars but because of the rising cost of living they may be having trouble paying the bills.
Mich Sneddon, a CA and CPA is the owner of Reverse Mortgage Pros, a leading reverse mortgage expert in Canada. Through his website and YouTube channel, Sneddon educates people in how reverse mortgages work. Through an online assessment form, he can help to determine if a reverse mortgage is right for them.
Sneddon says, “I assess people’s financial situation and offer advice on whether a reverse mortgage would be good for them. I connect them to one of the available lenders and based on what they’ve told me, I can advise them on which lender and product are the best fit.”
What is a reverse mortgage?
A reverse mortgage is a lending option that allows homeowners who’ve paid off all or most of their mortgage, to tap into their home equity. Reverse mortgage funds, which are only available on primary residences and only to people over the age of 55, are structured as lump sums or lines of credit that can be accessed on an as-needed basis.
The loan balance is usually not paid until the home is sold, either because the borrower moved or passed away.
When is a reverse mortgage a good fit?
A reverse mortgage is the best fit for someone nearing retirement or who has already retired; people who are struggling to enjoy their retirement years.
Sneddon says, “It’s for retirees who may be house rich and cash poor. They may be sitting on a million dollars tied up in their home, but they can’t afford to pay the bills. They don’t qualify for most regular mortgage products because they’re retired, and their income is low.” Because there are more lenders in the market today, reverse mortgage rates are more attractive.
How does a reverse mortgage work?
A reverse mortgage is a specialty mortgage product for homeowners who are 55 years of age and over. Sneddon says, “It’s designed for people who are retired or entering retirement and who want to remain in their own home. You aren’t required to have an income or a good credit score to qualify for a reverse mortgage which is why it’s a great option for retirees.”
You can get up to 55% of the value of your home but usually around 10% to 55%. There are no monthly payments. The interest is accrued and added to the balance owed and the mortgage is usually settled when the homeowners move or pass away.
Sneddon says, “The amount that a lender will lend is tied to your age so that you can’t use up all the equity in your home. If you’re 55, you’ll probably only get about 15 to 20%. You can use it as a lump sum, you can keep it in your bank account, or draw monthly amounts for living expenses.” The rules are like a traditional mortgage except that you’re not making payments. When you pass it will be settled through the estate.
The lender cannot take your home
With a reverse mortgage the homeowner has title to the home. Sneddon says, “If anything, it’s safer than a regular mortgage because with a traditional mortgage a lender could take your home if you default on payments. With a reverse mortgage there are no payments to make.”
As long as you pay property taxes and maintenance expenses, you can stay in the house as long as you like, and the terms won’t change regardless of the housing market or changes in prevailing interest rates.
Reverse mortgage vs HELOC
People also use home equity lines of credit to draw cash out of their home. A reverse mortgage works in a similar way as it allows the homeowner to take tax-free withdrawals rather than – for example – having to sell investments and pay taxes after a drop in the market. You would also need a sufficient income and credit score to qualify for a HELOC too – as well as having to pay the interest each month – none of which applies to a reverse mortgage.
Sneddon says, “A reverse mortgage rate is super competitive when compared to a HELOC. Today, reverse mortgage rates are lower than a HELOC and that’s why I believe reverse mortgages will become more mainstream in 2023.
Remain in your home longer
People often use a reverse mortgage to pay off an existing mortgage which frees up cash from the monthly mortgage payments. Retirees can use the money to pay off debts or make their homes more accessible.
Sneddon says, “People can use reverse mortgages to pay for in-home care because they would rather remain in their own home than go to a retirement or long-term care home.”
Reverse mortgage becoming more popular
Aging baby boomers, pandemic prices, and rising inflation are only a few reasons reverse mortgages are gaining in popularity. January was a record month for online views and customer inquiries for Mich Sneddon. “I’m anticipating 2023 to be a big year if people figure that a reverse mortgage will work out to their financial advantage.” Reverse mortgages can improve retirement planning outcomes and provide a critical backstop for people who may need the money.
If you think a reverse mortgage may be right for you, Mich Sneddon, CPA, CA would be happy to discuss your options.
The best place to start is by checking out his website and downloading a free reverse mortgage guide or you can check out his YouTube channel where he posts videos to help educate Canadians on reverse mortgages.