The product type comes with unique advantages and drawbacks
HomeEquity Bank issued a release breaking down the advantages and drawbacks of reverse mortgage products in the current environment, noting that they can help retirees fund their living expenses and age in place but also highlighting the additional costs at closing.
The bank said that reverse mortgages are ideally placed to help retired Canadians establish stable sources of income and cover their living expenses while remaining in their current home.
“Especially for people with a good chunk of equity in their home but not a lot of liquid capital or savings, they can use a reverse mortgage to turn that equity into accessible tax-free cash,” HomeEquity said. “Retirees don't always have to sell their home and downsize to a more affordable space. With a reverse mortgage, they can keep their property and stay where they've already grown comfortable and put down roots.”
Another understated benefit of the product type is access to tax-free proceeds, HomeEquity said.
“Reverse mortgages are tax free, so you can keep 100% of the money you get from this loan,” HomeEquity said. “A reverse mortgage also won’t affect your other benefits from Old-Age Security (OAS) and Guaranteed Income Supplement (GIS) programs.”
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However, reverse mortgages tend to come with additional costs at closing, HomeEquity said.
“While reverse mortgage borrowers don't have to make monthly payments, they do have to pay for other application and closing costs,” HomeEquity said. “These include appraisal fees, fees for independent legal advice, and administration or brokerage fees.”
For many consumers, the prepayment charges and higher interest rates might prove to be challenges, as well.
“The interest rates for reverse mortgages are slightly higher than they are for traditional mortgages or home equity lines of credit (HELOCs),” HomeEquity said. “If you partially or fully pay off your reverse mortgage early, you may face prepayment charges to the lender, depending on your contract.”
“Reverse mortgages can be helpful for certain homeowners who are over 55 and want access up to 55% of the cash value of their home while still living in and owning it,” HomeEquity concluded. “If you know you have a lot of equity in your home and you plan to continue living in that home, a reverse mortgage might be right for you. Just be sure you can cover any upfront fees or ongoing maintenance costs of your home.”
