Advantages and Disadvantages of a Reverse Mortgage

Advantages and Disadvantages of a Reverse Mortgage

Reverse mortgages are not a one size fits all solution.  It’s important to understand the pros and cons as with any major decision.

Let’s first consider the Top 5 advantages:

No Mortgage Payments: this is the number one reason Canadians choose reverse mortgages over a regular mortgage or home equity line of credit.  Monthly payments are not required. The principal balance and accrued interest are paid back when you decide to sell or move.

Easy Qualification: qualifying is not based on your income as with regular mortgages and home equity lines of credit.  Reverse mortgage lenders approve you based on your age, type of home, location of home, and home value.  

Tax-free Money: the money you receive from a reverse mortgage is completely tax-free.  Using the equity in your home allows you to preserve your investments and stretch your retirement.

Use The Money For Anything: the money from a reverse mortgage belongs to you.  It is your equity and you are free to use the funds however you wish.  The most common uses that we see are for home improvements, income supplementation, debt payouts that require monthly payments, travel, and helping children and grandchildren.

Stay In Your Home: you may live in your home for as long as you wish.  The reverse mortgage is only required to be repaid if and when you decide to move or sell.

Here are the disadvantages of reverse mortgages:

Mortgage Balance Grows: unlike a conventional mortgage from your bank, the balance grows over time due to accumulating interest.  This is the downside of not having to make monthly mortgage payments.  

Estate Reduction: if you borrowed the maximum amount possible, it is likely that the size of your estate will be reduced. If you have plans for the money left over for your family, it will be a good idea to consider having an open conversation. 

Higher Interest Rates: because of the qualification flexibility and no payment feature, the interest rates are higher than a regular mortgage or Home Equity Line of Credit.  

If you are still unsure if a reverse mortgage is the right strategy, please speak with one of our Certified Reverse Mortgage Specialist as well as your family members.