Are reverse mortgages worth the extra costs? - Kora Management
  • Mitch Speigel – Mortgage Agent
    Your Mortgage Group Professional
    Kora Management
    License #M08003984, FSCO #10315

  • Are reverse mortgages worth the extra costs?


    It Depends.

    A recent article, (paraphrased), written by a CBC reporter provides a somewhat balanced approach to Reverse Mortgages and the answer is. “It depends”.

    A reverse mortgage allows you to pull money from the equity of your home without having to sell it or make payments. Deciding whether to get one comes down to the math, writes Mark Ting

    Getting a reverse mortgage can inject some tax-free money into your bank account, without reducing your income-tested government benefits.

    A reverse mortgage allows you to pull money from the equity of your home without having to sell it or make payments.

    Who can get a reverse mortgage?

    To be eligible, you must own a primary residence and be at least 55 years old.

    How much can one borrow?

    The amount you can borrow is determined by your age. The younger you are, the less you can borrow. For example, 55 to 60 year-olds can only borrow up to 15 per cent of the value of their home, whereas someone who is in their 80s can borrow up to 55 per cent.

    Chip Max

    There is a new product called Chip Max, however, which allows younger borrowers to get a greater loan-to-value, by paying a slightly higher interest rate.

    Cash-flow poor, asset rich

    The typical reverse mortgage clients are in their 70s. They are cash-flow poor, but asset rich and a reverse mortgage solves this problem. A reverse mortgage allows seniors to live the life they’ve worked for.

    Extra Costs

    With respect to costs, you can expect to pay $1,800 to $2,300 for legal and administration fees, $300 to $400 for an appraisal, and another $300 to $500 for independent legal advice if your lender requires it.

    On the other hand, an appraisal and similar legal fees are often required on conventional mortgages.

    The current rate for a variable five-year term is 5.94 per cent and 5.99 per cent for a three-year fixed-term mortgage.

    The rates are approximately two per cent more than conventional mortgages because the lender is providing the fund upfront — foregoing scheduled payments and won’t get repaid until the borrowers die or the house is sold, which could take decades.

    Since borrowers are not making regular payments, they end up paying interest on their interest. Borrowing $100,000 for 10 years would have an estimated total interest cost of $80,000.  On the other hand, because the loan amounts are so conservative, the normal increase in house values of approximately 3% per year usually equal the interest amount.

    Most people who make use of reverse mortgages typically have cash flow problems so it is unlikely they will be able to repay the mortgage early.

    Penalty for repayment

    However, keep in mind that if you are suddenly able to pay down the loan, for example, because of an unexpected inheritance, you could be subject to a pre-payment penalty of up to five percent. A similar prepayment penalty would occur for a conventional bank mortgage as well. For a reverse mortgage, this penalty reduces over time and usually disappears after five years, because a Reverse Mortgage is supposed to be a long-term solution. Keeping a minimum amount of $15,000 in the borrowing account eliminates the penalty.

    If you want to see if a reverse mortgage is for you, call or e-mail us.

    Fresh cauliflower for dinner tonight. I will cut the centre, leaving in the core, into two one inch steaks. Then brush with oil, season, brown them and then bake them until tender. Cover with a mixture of roasted cherry tomatoes and garlic, along with chopped olives and parsley. If it stops raining, I may put the steaks on the BBQ.