Reverse mortgages – part 2

Last week, we posted a blog regarding reverse mortgages, which in the rest of the country, are on the rise in terms of their popularity because they allow older Canadians to remain in their homes; the term used is, “age in place”. How? By permitting them to tap into some of the equity found in their houses to supplement their lifestyles; call it, “a little extra monthly cash flow”.

Reserve mortgages is an excellent product but sometimes it is misunderstood, so we felt we would unpack it for you in this blog by giving you a concrete example. Before doing so, let’s quickly summarize what a reserve mortgage is?

This definition is taken from the Government of Canada website:

A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. This is sometimes called “equity release”. You can borrow up to 55% of the current value of your home.

The maximum amount you’re able to borrow will depends on:

Your age
Your home’s appraised value
Your lender

You pay back your loan when you move out of your home, sell it or the last borrower dies. This means you don’t need to make any payments on a reverse mortgage until the loan is due.

To be eligible for a reverse mortgage, you must be:

A homeowner
At least 55 years’ old

The home you’re using to secure a reverse mortgage must also be your primary residence. This usually means you live in the home for at least six months a year.

Before getting a reverse mortgage, you must first pay off and close any outstanding loans or lines of credit that are secured by your home. These can include a mortgage and a home equity line of credit (HELOC). You can use the money you get from a reverse mortgage to do this.

You can use the remainder of the loan for anything you wish, such as to:

Pay for home repairs or improvements
Help with regular bills
Cover healthcare expenses
Repay debts

You don't need to make any regular payments on a reverse mortgage. You have the option to repay the principal and interest in full at any time.

So let’s dive into an example using a reverse mortgage calculator.

Let’s call our homeowner Jack:

He is 68 years’ old
Male
Living in Montreal
In a single family dwelling
His home is estimated to be worth: $750,000
Based on this information, Jack could be eligible to obtain between $282,500 - $314,500 in tax free funds

Let’s use $282,500 to continue with our example:

Estimated mortgage amount is: $282,500
Estimated home value is: $750,000
Interest rate is: 5.49%
Term: variable

Say Jack plans to live in his house until he is 80, or 13 more years, and say his home appreciates annually by 3%.

Today his home is worth $750,000, in 13 years it will be worth $1,101,399
His mortgage is $282,500, in 13 years, it will still be $282,500 because Jack is not paying it down
The interest Jack will pay for the money he has extracted from his home will be $299,932 but this is offset by the appreciation of his home. We earlier put a conservative figure of 3%, but judging on how prices have been appreciating, this number could be a lot higher
When Jack decides to sell his house for $1,101,399, he will pay back his loan + interest, and still be left with $518,967 in equity, which he can use as he sees fit. During those 13 years, Jack has used the money to supplement his monthly income by over $1800 a month. Or Jack could have reinvested this money, generating a higher yield than the interest he is paying. The options are limitless.

Not convinced, let one of our mortgage brokers dispel the myths around reserve mortgages. It could be the ideal product for you to address your current financial situation.

Martin Spalding

Mortgage Broker

(514) 206-0488

mspalding@nordest.ca