As a result, Canadians are turning to reverse mortgages to catch a break. Heightened by the disruption of COVID-19, reverse mortgages attract more press than ever as the solution for seniors struggling to meet their monthly expenses.
No matter how overwhelming your debt feels, there are solutions available to help you live a debt-free retirement. Let’s explore the pros and cons of reverse mortgages before making your next financial move.
What is a reverse mortgage?
A reverse mortgage is a type of home equity loan that’s exclusively designed for homeowners aged 55 and up, to access their home equity and convert it into tax-free cash. Qualifying homeowners can borrow up to 55 percent of the value of their home and receive payment either as a lump sum or monthly payment.
To be eligible for this loan, you need to remain in the house of your principal residence, pay property tax bills, and keep valid home insurance. The only time you need to pay back the loan is in the case of death (when the last surviving owner dies), in a sale, or if you choose to move out.
In Canada, the outstanding balance of reverse mortgage debt reached $4.42 billion in October 2020, a 13 percent increase from the year before. Cashing in has caught on in the wake of mass business closures, where millions of Canadians faced sudden cash flow problems.
The benefits of a reverse mortgage
Reverse mortgages create cash flow from a house you own. The money you receive is tax-free and doesn’t interfere with retirement benefits such as Old-Age Security (OAS) or Guaranteed Income Supplement (GIS), which can serve as a lifeline for seniors struggling to make ends meet.
Unlike other loans, reverse mortgages don’t require income to qualify or minimum monthly payments during the borrowing term. Plus, there are no restrictions on the use of the funds once they’re in your hands. This gives you the freedom to use it for in-home care, home renovations to better age in place, prescription drugs, and more. Seniors who lose their source of income can use the funds to pay off their conventional mortgage in full if they can’t make their traditional mortgage payments.
The drawbacks of a reverse mortgage
Just because you don’t have to make regular payments doesn’t mean you shouldn’t try to pay down your debts. In exchange for recurring payments, seniors pay a much higher interest rate to borrow on reverse mortgages – sometimes double or triple a conventional mortgage rate. The longer the loan draws out, the more interest compounds, which may leave you with a lot less equity than expected when you finally do sell the home. This is particularly harmful if you need that equity to pay for end-of-life care or hope to leave something to your family.
Why are seniors rushing to tap into reverse mortgages?
Feeling it’s too late to start saving, seniors experience financial anxiety and shame when they realize they cannot afford their retirement. There are numerous reasons for the senior debt crisis: layoffs and lack of employment options, heavy financial losses from a stock market crash, health care costs, supporting adult children, or perhaps a divorce late in life. But the demand for reverse mortgages primarily comes from those struggling to pay off their debts on a fixed income.
Today’s retirement benefits simply can’t keep up with the cost of living. Pensions are declining, seniors are still repaying debts owed from before they retired, and there’s little left behind in savings. But there is a bright side – experienced Licensed Insolvency Trustees have seen every type of financial situation imaginable and can find a debt relief solution that fits you.
Before you risk your secured assets with more debt, talk to us to see if we can eliminate the debt and protect your home for you and your family.
Putting your best foot forward
Like all Canadian debtors, seniors can seek out help to improve their financial situation. The sooner you reach out for help, the more options you may have. Our Licensed Insolvency Trustees at BNA Debt Solutions can help you achieve financial relief, so you can enjoy your retirement to the fullest. We offer a range of debt relief options from budgeting, debt consolidation, debt management, and more. Book a consultation today.