Canadian Reverse Mortgage: Reversal of Fortune or Equity Drain?

If you’re a Canadian facing financial uncertainty you may be tempted to utilize a reverse mortgage as a means of reversing your fortunes.  Before you do, you should take a good hard look at the pros and the cons and decide if it’s a smart decision for you or a way of sucking equity out of your empty nest.

Pros

Credit doesn’t matter as much – If your credit stinks and you need fast access to cash, the reverse mortgage may be a good way to get it.  The amount you’ll qualify for is going to depend upon a variety of factors, including your overall credit rating.
No payments required – A reverse mortgage doesn’t require you to make monthly payments on the amount borrowed.  Instead, interest is applied to the equity you have in your home on a monthly basis.

You get to keep your home – If you need cash a reverse mortgage is a good way of getting it.  If you have a lot of debts or are unsure of your ability to keep your home due to property taxes, utilization of a reverse mortgage might make good sense.

The bank can’t take your home – If you get a reverse mortgage you get to stay in your home until you move or die.  If you live a very long time, it’s possible that this could be a losing transaction for your lender.  However, the lender cannot force you to move if you live longer than anticipated.

Cons

The fees are high – Loan origination fees and other fees are a major part of the upfront cost of the reverse mortgage.  These fees get skimmed off the top.  If you don’t want to pay these fees, it is better if you not get the loan. They typically run 5%-6% of the amount borrowed.

Interest charges suck equity out of your home – Make no mistake about it.  A reverse mortgage is not free money.  Instead of making payments on your home each month, interest charges are added to your loan balance.  If you sell your home the loan has to be paid back.

Is a bad idea if you have moving plans – A reverse mortgage is a bad idea if you plan on moving any time soon.  Because the loan has to be repaid when your home sells, this option doesn’t make good sense if you have a move in your future plans.

These are some of the pros and cons of a reverse mortgage.  Only you can decide if it’s a smart decision for your economic situation.  If you think you may be moving soon or you want a family member to inherit your home when you die, it’s not a good idea. 

If however, you’re facing financial uncertainty or you don’t have a desire (or a need) to keep your home in the family, this option might make sense.  Regardless of what you decide to do, you should take advantage of the counseling that comes bundled with the transaction.  Learn all you can about reverse mortgages before signing your equity away.  

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