Let’s start by adding some clarification on how much a Canadian Homeowner can borrow with a Reverse Mortgage.
The maximum threshold today is up to 55% of the appraised home value. The lender determines the loan to value at which they are willing to lend based on the applicant’s age, home type, location, and condition.
Older applicants may receive high loan limits as they are likely to pay back the bank sooner due to a sale or relocation rather than somebody who is only 55 years of age.
The average Reverse Mortgage amount in Canada is around 35%-40% of the home’s value.
This information is key as many Canadians are under the impression that they can borrow 55% upon request. Again, it is the lender who determines the maximum eligibility.
The low loan amounts are a great policy. It helps to ensure that the homeowner is guaranteed equity at the end of their term.
In some cases, however, even the maximum mortgage amount is not enough to payout existing mortgages and other debts. In such instances, we are able to utilize secondary mortgage products to cover any shortfall.
Here is an example of a common scenario:
Let’s assume that this homeowner qualifies for a Reverse Mortgage in the amount of $280,000. As we can see, this is not enough to pay out the existing $300k mortgage + $30k in other debts. We have a shortfall of around $50k.
If advisable, a Second Mortgage in the amount of $50k could allow this borrower to make up the difference. It’s important to speak with an experienced Mortgage Advisor who specializes in Reverse Mortgages. The strategy of obtaining a Reverse Mortgage in conjunction with a Second Mortgage will not be the right fit for everyone.
What About Mortgage Payments?
The first mortgage, being the Reverse Mortgage, will require $0 monthly payments. The second mortgage, however, will require a minimum interest-only payment every month. The interest rate will depend on the loan amount, property, and quality of the credit history.
For the purpose of this scenario, let’s assume a realistic monthly payment on the $50k Second Mortgage of $400 per month.
The total monthly debt payments have been reduced from $2,100 per month to $400 per month. Total savings of $1700.
What would you do if you had an extra $1700 every month?
For more detailed information on Second Mortgages and how they work, we invite you to read our article title “Is A Second Mortgage A Good Idea?”.
If you are not sure if a Reverse Mortgage or even a Second Mortgage is right for you, please contact us for a free phone consultation and we will be happy to provide independent and unbiased advice.