What do you get when you reverse a mortgage?
When you take out a "reverse mortgage" on your home you get a loan; and although you have to repay the loan and pay interest on it too, you don't normally have to make a single payment until you sell the house...or die.
This sounds like a great deal, right? However, not everyone can get in on it. The borrower has to be of retirement age (at least 62), and has to own a home in an area where real estate prices aren't likely to fall. The borrower can't borrow the full value of the home, in fact he or she can borrow only up to about 40-50 per cent of the value...depending on age (the older the borrower, the larger the amount that can be borrowed), sex, marital status, type, and location of the property, and prevailing interest rates. If there's an existing mortgage on the house, it has to be paid off out of the funds provided under the reverse mortgage.
The average mount of a reverse mortgage is about $50,000. The homeowner can choose to take the borrowed money as a guaranteed monthly payment (usually for life), as a lump sum of cash, or as a combination of two. Most people take the cash. The homeowner can use the money to do whatever he or she likes - make necessary repairs to the house, pay for a grandchild's education or go on a gambling spree.
And wait, there more. Income generated from a reverse mortgage loan is taxable, but the interest that accumulates on the loan is deductible - so there won't be much tax to pay on the income from the reverse mortgage. (This is true even though in Canada interest payments on an ordinary mortgage are not deductible).
The borrowed money and the interest do have to be paid back eventually - usually when the homeowner sells the house or dies or, in the case of a couple, when the survivor dies. Then the money owing is paid out of the proceeds of sale of the house or out of the estate. (It's also possible to make arrangements to pay the mortgage off before sale or death occurs).
So what's the catch? The interest that accumulates on the loan can be quite hefty. The accumulated interest after ten years on a $50,000 reverse mortgage with interest at 9.15 per cent will be approximately $70,000. That means repaying about $120,000 for the $50,000 borrowed.
A homeowner's kids may object to a reverse mortgage, especially if they're not getting some of the lump sum, because it reduces what they'll inherit. Also, if the homeowner has to go into a nursing home and needs to sell the house or borrow against it to finance care, he or she may find that the reverse mortgage has eaten up the house's equity and that the house is worth a lot less than anticipate.
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