What is a Reverse Mortgage?
A reverse mortgage is simply a loan taken out against the equity that has built up on a property. For example, an Ottawa mortgage holder might have bought a property 22 years ago with a 25 year amortization period. During that time, most of the mortgage has been paid off and the value of the home has, on average in Canada, at least tripled. So the value of the home may be worth 300% or more of the remaining mortgage.
The borrower receives a lump sum and has the option to make no repayment until the property is sold or the mortgage holder moves out (or passes away)—at that point, the loan and interest must be paid. During that time, the principal owed remains the same and interest accrues. Currently, at an average rate of 9%, the amount owed doubles every seven to eight years. On a loan of $100,000, the borrower will owe $200,000 in 7 years and $300,000 in 14 years. Even if the amount owed becomes more than the value of the home, the lender cannot legally foreclose on the property, as long as the borrower owns the home and lives in it. The borrower must meet the obligations for home upkeep, taxes, and insurance, or the lender can request full repayment.
Reverse mortgages are designed for seniors (the borrower must be 62 years or older), as typical Canadian seniors have 80% of their financial assets tied up in real estate equity. These mortgages are used as a means of supplementing retirement income, to adapt homes to changing life needs (mobility features, grandchildren suites, etc.), or to help out heirs financially while the homeowner is still present to witness the positive effects.
Reverse mortgages are also used to create cash for investment opportunities. In Ottawa, mortgages can be take out on a home for further real estate investment and the interest paid on the mortgage can be used as a tax deduction when the Smith Maneuver is used.