Is a reverse mortgage a good thing? Fortunately, it’s easy to find out whether a reverse mortgage would serve your particular needs.
It depends on two main things. The first is how much money you can borrow with the reverse mortgage. That depends on your actions that you took in your past. Let’s call this your situation. The second thing is how much house prices are growing in your area. This has very little to do with you particularly. It’s not something you can really influence. This is the real estate situation.
So there’s your situation and the real estate situation. Now let’s answer the question “Is a reverse mortgage a good thing?”
In your immediate situation–RIGHT NOW, in other words, you actually don’t have a lot of influence over either of these factors. So if you really want a reverse mortgage, you might be disappointed to learn that you don’t qualify.
On the other hand, the good news is that the second factor tends to work in your favour if you are a homeowner in Canada.
An article from CBC news in late 2017 shows that the average price of a Canadian home went up by three percent from September 2016 to September 2017. That happened and it had nothing to do with you. It’s a benefit of being a homeowner in this great country of ours.
Home price increases in the Toronto and Vancouver areas are even higher. Depending on the neighbourhood or town you live in, those increases might even be 2 to 3 times higher than the national average.
So is a reverse mortgage a good thing? Well as long as you meet the basic criteria (you own a home and live in it as your principal residence, and you and whoever else on title is over 55 years old), it’s a mortgage type you should consider. Why not know your options?
The “Rule” for Reverse Mortgages
Remember this rule for reverse mortgages: let’s call it “the rule of thumb for reverse mortgages” (or “proportional growth offsetting” if you prefer a more specific term). Here’s the rule: whatever amount (percentage-wise) of your home that you take out as a reverse mortgage, say 50%–that’s the amount that your home has to rise in value (against the interest of rate of the mortgage) in order to offset the equity you are losing to interest payments.
So if you mortgage 50% of your home, and the interest rate is 6%, then your home has to grow by 50% of 6%–so 3%. If your home grows that year by 3%, then you won’t lose any equity.
Remember, as long as your house is going up in value by this amount, then you won’t lose anything with a reverse mortgage. In other words, you will have the money from the mortgage, and your equity will stay safe because it keeps growing.
Talk about having your cake and eating it too.