More and more senior Canadians are using their home equity in a process known as ‘reverse mortgage’ to help boost their retirement income, pay for home repairs and upgrades, cover healthcare expenses or pay off debts.

Reverse mortgages enable those homeowners who qualify, to borrow up to 55% of their home’s value (entirely tax free) while maintaining ownership of their home. If this sounds like something you might want to consider, here are a list of the pros and cons of reverse mortgages, some of which you may wish to discuss in further detail with a local mortgage broker:

What are the pros of reverse mortgages?

• Struggling with high household debt levels and having to adjust to lower incomes during retirement, are just two of the things many Canadian seniors are forced to face, and mortgages and HELOCs due to certain income verification rules. One significant advantage of reverse mortgages is that income verification is not required, making this type of loan an attractive alternative source of income for seniors.
• Additionally, regular payments don’t need to be made until your home is sold or you pass away, you don’t have to pay tax on the money you borrow, and you don’t need to interrupt government benefits, such as Old-Age Security (OAS) or the Guaranteed Income Supplement (GIS).
• Depending on the lender you choose, reverse mortgage payments can be obtained as a lump sum or as recurring deposits into your bank account, and provided you pay off any outstanding loans or lines of credit, there are no restrictions on how you use the remainder of the funds.

What are the cons of reverse mortgages?

• If you plan to leave your home to your children or other beneficiaries, it’s important to note that a reverse mortgage can create issues for those heirs. At the end of your borrowing term, there may be less money in your estate as a result of the loan, and if you decidenot to repay the principal and interest, the equity you hold in your home may also go down as you accumulate interest on your loan. In some instances, the time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage.

• After your death, your estate must repay the loan and interestwithin a set period of time, which could result in beneficiaries being left less money in your estate.

• With a reverse mortgage, interest rates tend to be higher than those associated with traditional mortgages or other credit products. There are also fees associated with reverse mortgages, which typically include a home appraisal fee, setup fee, legal fees, and closing and administrative costs. Some of these fees may be added to the balance of your loan while others may have to be paid upfront.

As with any type of mortgage, it’s important to understand all of the terms, and all of the pros and cons before committing to anything, and seeking guidance from an experienced mortgage broker can help ensure that you make an informed decision.