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A reverse mortgage is a scheme where instead of borrowing money to buy or keep a house, an individual uses the property in their name to create short-term borrowed wealth. Here, the accepted cases include the homeowner having enough home equity in their name, they are senior citizens, and the house in question has to be their primary home. A reverse mortgage can sound similar to a loan against a property or a line of credit scheme, but the catch is that the borrower does not have to make monthly recurring payments to the bank. Instead, the amount is paid back when the property is sold, the house-owner dies or moves out to a different primary house.
A person may be eligible for a reverse mortgage if they meet the age and equity parameters. Reverse mortgages are generally meant for senior citizens looking for additional financial assistance to meet their goals in their retirement age. This and the fact that most senior citizens are more likely to own a house or a large percentage of their home mortgage is paid off, giving the room for larger equity in ownership. They can use these equities to avail of a reverse mortgage.
The eligibility conditions for a getting a reverse mortgage are as follows:
Individual to be 55 years of age or older
Must own a larger part of their home equity
Must have paid their mortgage in full or nearing the end of amortisation
Financial status is an important factor in determining how much of a reverse mortgage can be sanctioned
Should not have any permanent disability
A reverse mortgage is sanctioned on home equity, also known as an equity release. The speciality of this financing is that the homeownership does not go away because the owner does not need to sell his house to pool some quick cash. This could also sound similar to a collateral loan, but the borrower need not make any steady monthly payments in a reverse mortgage. The mortgage amount is decided on factors such as the borrowers age, home equity evaluation, and bank policies. The borrower needs to ensure that, once the reverse mortgage is engaged, they are limiting their homes potential to be used for additional financing. Moreover, if any Home Equity Line of Credit (HELOC) is still pending, that needs to be paid off as early as possible.
Once the mortgage is provided, customers can use the money for several reasons, such as home renovation, bill payment, healthcare, or paying off any remaining debts. The borrower will have a choice of taking the monetary assistance in a lump sum or taking the amount in parts over time. Even though there is no compulsion to pay back the mortgage regularly, there is still a requirement of making a processing fee along with other charges such as a service payment.
There are a few variants of reverse mortgages that the banks have designed to help customers achieve their financial goals in multiple ways. The banks in Canada that provide reverse mortgages include Equitable Bank and Home Equity Bank. They have assessed the needs of the people and developed a few stable variants of the reverse mortgage.
The types of a reverse mortgage are as follows:
Home Equity Bank CHIP Reverse Mortgage: The CHIP or Canadian Home Income Plan is designed by Home Equity Bank where customers can simply secure monetary assistance against their home equity without the need to sell or move out of the house. The income generated is tax-free and can be used to meet a multitude of ends.
Home Equity Bank CHIP MAX Reverse Mortgage: This special reverse mortgage plan has been targeted at the young to inspire them to invest in housing and access to large home equities. Customers can secure a loan against their house with the flexibility of repayment. The loan amount is only required to be paid bank once the owner moves out of the house. The customer should be 55 years of age, and the home value should be CAD 300,000. In this scenario, 55% of the home value can be processed.
A reverse mortgage can be beneficial to borrowers in various ways. These various advantages can provide the customer with a suitable platform to unlock their complete financial freedom in their retirement age, including tax benefits and flexibility in repayment.
Some of the advantages of getting a reverse mortgage are
Elimination of recurring payment systems
Freedom of choosing the repayment duration
Can be immune from the dynamic market payment as the borrowed money can support in case of property price dip
Freedom to choose the payment method. Customers can select the frequency of payments
Provide financial support at the time of retirement
Generation of financial support without the need to sell the property
This mortgage will not interfere with the government schemes that the customer is already getting
There are quite a few things that a customer will have to provide when applying for a reverse mortgage. These are given so that banks can document the transaction. The documents that will be provided include identification proof, residential proof and a house evaluation report.
The process will begin with banks providing a Reverse Mortgage application form, which must be filled with information such as personal details, income and asset value, existing mortgage details, etc. The banks will do background checks based on the bank statements and credit history. The assessment later will determine whether the applicant has a suitable credit score or not. The banks will also need to see the title or ownership proof of the property.
If the mortgage is completely paid off, banks would require a no-objection certificate from the property owner. In addition, the lender would want to check the bank statements the owner has made for the mortgage payment.
On top of the interest calculated on the principal mortgage amount, there are a few different charges that can be incurred to the customer. This can include reverse mortgage processing, appraisal, legal advice, lawyer service charges, land transfer tax, insurance, etc.
The fee details are as follows:
|Appraisal Fee||CAD 300 to CAD 600|
|Legal Fee||CAD 300 to CAD 700|
|Insurance Fee||CAD 100 to CAD 300|
|Property Evaluation Cost||CAD 200 to CAD 400|
The interest rates of the Canadian Reverse Mortgage are generally higher than a regular mortgage owing to the reason that in a reverse mortgage, the customer does not need to make any monthly payments. Moreover, the bank needs to wait for the whole term of 5-10 years until they can get their money back. Lastly, there is a rule regarding the reverse mortgage where the recovery amount cannot exceed the property valuation.
The reverse mortgage interest rates from the sole two service providers are as follows:
|Term||Home Equity Bank (CHIP)||Home Equity Bank (CHIP Max)||Equitable Bank (FLEXI)||Equitable Bank (Lump Sum)|
|1 Year Fixed||6.40%||7.75%||5.89%||5.79%|
|2 Year Fixed||-||-||6.59%||6.29%|
|3 Year Fixed||7.25%||8.60%||6.64%||6.39%|
|5 Year Fixed||7.35%||8.70%||6.74%||6.49%|
Generally speaking, reverse mortgages can help get back on track if anyone faces foreclosure. The money owed to the lender can be quickly paid off with the reverse mortgage amount while the owner is still able to keep the house to themselves. Moreover, the reverse mortgage money can help the owner take a breather on the monthly interest payments. In cases where this happens, the borrower manages to resist foreclosure.
Now the question is, should you avoid foreclosure with a reverse mortgage? The answer is that caution must be taken while applying for a reverse mortgage to avoid foreclosure. This might only help a certain customer and not others.
Firstly, the house equity should be enough for the banks to consider providing a reverse mortgage.
Secondly, the borrower must understand that taxes, insurance fees, legal fees, and other charges will be involved.
Thirdly, the house owner needs to be at least 55 years of age to be allowed to apply.
Furthermore, most of the house equity would no longer be under the house owner.
Whatever the case may be, it is always best to consult a legal expert before taking any further decisions. Other options are available, not just reverse mortgages, such as traditional mortgages, to name one.
Ans - A reverse mortgage is more expensive than a conventional mortgage scheme. However, since there are only two provider banks on the market for the reverse mortgage, there is a duopoly happening with the rates. The interest rates can be expected to increase over time.
Ans - Reverse Mortgages can be refinanced with another financier. Given the house can be used as collateral with enough equity to support the borrower, to begin with.
Ans - The reverse mortgage gives the freedom not to make any monthly payments. However, the loan amount will have to be paid back once the house is sold, when the owner decides to move, or if the owner dies.
Ans - A reverse mortgage can work if you are a senior citizen at least 55 years of age with enough home equity backing to finance your reverse mortgage. The reverse mortgage can be used to pay off debts, manage expenses, renovate the house, help the family, or pay for an existing mortgage.
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