If you are age 55 or over, you can use your home equity to get cash through a reverse mortgage. You don't have to pay back this loan until you sell your home.
In most cases, you can borrow between 10% and 40% of your home’s value. It depends on what your home is worth, your age and interest rates. You must pay off any other loans on your home, including any unpaid mortgage.
5 advantages of a reverse mortgage
Frees up cash – Invest the money, buy an annuity to create monthly income or use it to cover expenses.
Reduces cost of borrowing – You pay no tax on the money you borrow and make no loan repayments as long as you stay in your home.
Creates tax break – You can deduct the interest on the loan from your taxes if you invest the money you borrow. This deduction may offset any tax you may pay on unsheltered investments.
Allows you to stay in your home – You can maintain your lifestyle in a home you love in an area you like.
Keeps equity – You have equity in an asset that may go up in value, and add to your estate.
Make sure your reverse mortgage guarantees that you will never have to pay back more than what your home is worth when you sell it.
8 disadvantages of a reverse mortgage
Reduces home equity – You may use up most or all of your equity in your home to pay back the loan. This will leave less for your family or estate.
Does not eliminate costs – You still have to pay property taxes, maintenance costs and home insurance.
Builds up debt – You pay interest on the interest, and you have to pay the loan back when you sell.
Adds costs – To get the loan, you have to pay appraisal fees, application fees, legal fees and closing fees.
Charges higher interest rates – Reverse mortgages have higher interest rates than regular mortgages.
May increase cost of borrowing – If interest rates go up, your interest payments may increase.
Difficult to get your money out – You must pay off any loans on your home first, including a regular mortgage.
Expensive to cancel – There may be high penalties if you change your mind later or want to pay off the loan sooner.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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