‍Explore the advantages and disadvantages of reverse mortgages in Canada. Learn about the benefits and drawbacks of this financial option with Bloom.

Many Canadian homeowners aged 55 and older are exploring ways to make the most of their home equity to support their retirement lifestyle. 

A reverse mortgage is one option that allows access to this equity without selling the home. 

However, like any financial decision, it comes with its own set of pros and cons. 

This guide will help you understand the advantages and disadvantages of reverse mortgages in Canada, so you can make an informed decision.

What is a reverse mortgage?

A reverse mortgage is a loan available to Canadian homeowners aged 55 and older, allowing them to access a portion of their home’s equity. Unlike traditional mortgages, homeowners do not make regular payments. Instead, the loan is repaid when the home is sold, the homeowner moves out, or passes away.

Read more: What is a Reverse Mortgage? Everything You Need To Know

The pros and cons of reverse mortgages

Understanding the pros and cons of reverse mortgages is essential for making the best financial decision for your situation. This section explores the benefits and drawbacks of this financial product.

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Pros of reverse mortgages

Access your home’s equity

A reverse mortgage allows homeowners to unlock the equity in their home without having to sell it. This provides a valuable source of funds for those who may not have sufficient liquid assets.

You can use Bloom’s free calculator to see how much money you could qualify for. 

No monthly mortgage payments

One of the significant advantages of a reverse mortgage is that there are no monthly mortgage payments required. This can be especially beneficial if you have a limited income, as it frees up cash flow for other expenses.

Tax-free income

The funds received from a reverse mortgage are not considered taxable income. This allows you to access your home’s equity without affecting your tax situation.

Flexibility in use of funds

Reverse mortgage funds can be used for a variety of purposes, including paying off mortgages, home renovations, healthcare expenses, daily living costs, helping family members, or even travel. This flexibility allows homeowners to tailor the use of funds to their specific needs.

Stay in your home

With a reverse mortgage, homeowners can continue to live in their home while accessing its equity. You can age in place and maintain your independence.

Delay drawing from other retirement accounts

By using funds from a reverse mortgage, homeowners can potentially delay withdrawing from their RRSPs or other retirement accounts, allowing these investments to continue growing.

Living inheritance for heirs

Some homeowners use reverse mortgage funds to provide financial support to their heirs while they are still alive, offering a "living inheritance" that can help with education costs, down payments, or other needs.

Does not affect government benefits

A reverse mortgage does not affect Canada Pension Plan (CPP), Guaranteed Income Supplement (GIS), or Old-Age Security (OAS) benefits.

How does a reverse mortgage work in Canada? Find out here, with real world examples

Cons of reverse mortgages

Accruing interest and growing balance

Interest on a reverse mortgage accrues over time, increasing the total amount owed. This can reduce the equity remaining in the home.

Impact on estate and inheritance

Since the reverse mortgage must be repaid upon the homeowner’s passing or sale of the home, it can reduce the inheritance left to heirs. It’s important to consider this impact on your estate planning.

Read more about paying back a reverse mortgage.

Fees and closing costs

Reverse mortgages come with fees and closing costs compared to traditional mortgages. These can include appraisal fees, legal fees, and administrative costs.

Limited loan amount

The amount you can borrow with a reverse mortgage is limited to a percentage of your home's value.

Requirement to maintain home

Homeowners are required to maintain their property and keep up with property taxes and insurance. Failing to do so can result in the loan becoming due.

Impact on moving plans

If you plan to move in the near future, a reverse mortgage may not be the best option, as it becomes due when you move out of your home.

Comparing reverse mortgages to other financial options

When considering a reverse mortgage, it's important to compare it with other financial options available:

Home equity line of credit (HELOC)  

A HELOC allows you to borrow against your home equity, similar to a reverse mortgage. However, HELOCs require monthly payments, and your credit score and income are key factors in eligibility.

Read more about them here.

Selling your home  

Selling your home can provide a large lump sum, but it also requires you to move out. This option might be suitable if you are willing to downsize or relocate.

Traditional mortgage refinance  

Refinancing a traditional mortgage can provide additional funds, often at a lower interest rate. However, it requires regular payments and may involve stringent credit and income requirements.

Who should consider a reverse mortgage?

The ideal candidates  

Reverse mortgages are best suited for Canadian homeowners aged 55 and older with significant home equity, who wish to remain in their home and want additional funds to supplement their retirement income.

A reverse mortgage is a good option if you have limited retirement savings, need funds for healthcare or home improvements, or want to provide financial assistance to your heirs without selling your home.

Why use Bloom for your reverse mortgage?

Choosing the right provider for your reverse mortgage will ensure a smooth and transparent experience. Bloom is a leading option for Canadian homeowners considering a reverse mortgage. Here’s why Bloom should be your top choice:

Transparent process

At Bloom, transparency is a cornerstone of our service. We believe in providing clear and comprehensive information about all costs and terms associated with your reverse mortgage. There are no hidden fees or unexpected charges, so you can make informed decisions with confidence.

Fast approval

Time is valuable, especially when you're making significant financial decisions. Bloom's streamlined process ensures quick approvals, often within just a few days. Our dedicated team works diligently to expedite your application, providing you with the funds you need promptly.

Hassle-free appraisal

Unlike many providers, Bloom often does not always require an in-home appraisal, making the process more convenient for you. The cost of the appraisal is covered upfront and deducted from the mortgage proceeds, so you don’t need to pay anything out of pocket.

Bloom’s prepaid card

Almost three in five of Canadian homeowners over 55 say the ability to access micro-amounts of money on a monthly basis to support necessities (groceries, ongoing bills) would significantly help them achieve the quality of life they want. 

In light of that, Bloom offers a unique Home Equity Prepaid Mastercard, the first of its kind in Canada.  This card acts like a debit card, allowing you to spend up to $2,000 each month without having to make any payments until you sell your home. This flexibility helps manage interest accumulation and provides a convenient way to cover everyday expenses.

Competitive rates and minimal fees

Bloom offers competitive interest rates comparable to traditional reverse mortgages. Our transparent fee structure ensures you know exactly what to expect, with no hidden costs. This makes Bloom an affordable and reliable choice for your reverse mortgage needs.

Exceptional customer service

At Bloom, we pride ourselves on providing exceptional customer service. Our knowledgeable and friendly team is here to guide you through every step of the process. Whether you have questions about your options or need assistance with the application, we are committed to offering personalized support and expert advice tailored to your specific situation.

Home ownership

You continue to own 100% of your home, just like with a traditional mortgage.

Home equity guarantee

With Bloom, you can rest assured that you or your heirs will never owe more than the fair market value of your home at the time of sale. In the rare event that your home’s value decreases, Bloom offers a Home Equity Guarantee, so you will never owe more than the value of your home.

Frequently asked questions about reverse mortgages in Canada

What happens if I default on my reverse mortgage?

Defaulting on a reverse mortgage can occur if you fail to meet the loan’s conditions, such as maintaining the property or paying property taxes. In such cases, the lender may require repayment of the loan, which could result in the sale of the home.

Can I get a reverse mortgage with a low credit score?

Yes, reverse mortgages primarily consider the equity in your home rather than your credit score, making them accessible even to those with lower credit scores.

How much money can I borrow with a reverse mortgage?

The amount you can borrow depends on factors such as your age, the value of your home, and current interest rates. At most, you can access up to 55% of your home's value.

What happens to my reverse mortgage if I decide to sell my home or move?

If you sell your home or move, the reverse mortgage becomes due. The loan, including accrued interest and fees, must be repaid from the sale proceeds.

Conclusion

Reverse mortgages are helping many Canadian homeowners access their home’s equity. Understanding the pros and cons is essential for making an informed decision. 

For more information and to explore if a reverse mortgage is right for you, call 1-866-882-5666, or leave us your contact information here and we’ll call you at your preferred time.

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