Canadian Reverse Mortgage Pros And Cons

The purpose of this article is to offer you more details on the pros and cons of a reverse mortgage.  For a more full discussion of a reverse mortgage we suggest you download our free guide at http://www.reversemortgagepros.ca/reverse-mortgage-secrets.

'Reverse mortgage' is the term used for this type of mortgage product in only two other locations - in both Canada and the U.S.A. - so it is very important to be familiar with the differences between the two of these first off.

Canadian and American reverse mortgages are 100% different in many ways. In truth, a number of the negative impressions of the Canadian solution come from confusing them with the U.S. financial solution.

If you have heard anyone say bad things about a reverse mortgage then there is a very good chance that they are talking about the American product, not the Canadian one.

Having made it clear that this post is strictly talking about a Canadian reverse mortgage, let's get to talking about the benefits and drawbacks of this solution.

Keep in mind that if a subject you thought would come up isn't discussed in this article, then there is a great chance that you have this confused with the American version.

The Main Pros (Positive Benefits) Of A Reverse Mortgage In Canada

The following represent the pros - or positive benefits of a reverse mortgage in Canada:

• You can use the money for whatever you feel like.  There are absolutely no restrictions on it's use.
• You keep your home for life.  Period.  No ifs or buts.  No matter what someone says to you.  If you hear anyone saying otherwise then they are probably talking about an American reverse mortgage not a Canadian one.  In Canada, it is written into the legal contract that the lender can never assume ownership of your home.  Reverse mortgages were designed to help keep you in your home.
• The funds are absolutely tax free. There no income tax, capital gains tax or any form of tax applied to the money.  Remember that technically this is still a loan/mortgage - so of course there is no way it can be taxable. 
• You don't have to make any repayments, ever.  There are no payments - unless you willingly choose to do so.  This is the only mortgage product in Canada of this kind.  However, you can choose to voluntarily make payments each month - for example, many people choose to pay the interest each month.  What you are doing if you choose to pay the month-to-month interest as a voluntary payment is making your reverse mortgage into the exact same product as a Home Equity Credit Line - where you are paying interest monthly - except that this payment is now entirely voluntary.

Ok so that is the plus side covered.  What about the other side of the coin?

What Are The Cons (Negatives) Of A Canadian Reverse Mortgage

Before making any financial decision, it is important to weigh both sides.  So let's take a look at the drawbacks to a reverse mortgage:

• Considering that a reverse mortgage is still a loan, interest rates are a great area to begin with - when discussing the downsides - as these are typically much greater than the options out there (such as a 'typical' home mortgage or Home Equity Line Of Credit).  Whilst interest rates are, however, lower than a loan or unsecured line of credit, it is worth noting that the risk-free advantages you can get (listed above) come at a somewhat higher price in the interest rate.  You should think about if this is a rate you are happy to absorb to gain access to these benefits.
• Another additional thing to think about is that moving out of your home is harder.  Remember how we mentioned above that a reverse mortgage was designed to help keep you in your home?  Well, this is something that you need to think about as maybe - further down the line - this is not something that you'd want.  So, at this point, you'd now have to settle the mortgage and go through a legal process to leave.  Nevertheless, it needs to be noted that this also applies to a regular home mortgage, reverse mortgage or Home Equity Credit Line - all of these options make it more difficult to leave your home.
• Your home equity might decrease.  We use the word might, because in most cases home price growth (appreciation) is more than enough to offset any equity decrease.  In fact, 99% of Canadian homes see equity remaining when the reverse mortgage is discharged.  Not only this, but many people in Canada just now - who have reverse mortgages on their home - are seeing their home equity increase because the growth in their house price more than offset the interest.

So those are the main down-sides to a reverse mortgage.  Now what?  Well...

Deciding If A Reverse Mortgage Is Right For You And Your Family

The fact you are reading this means you are probably trying to decide if a reverse mortgage is right for you and your family.

I would suggest you gather as much information as possible, seek professional advice and check out the guide linked to at the top of this article.

These are a fantastic product for someone who is 'house rich but cash poor'.  The best way to think about them is that your home is an investment you made in during your life and you are now going to reap the benefits in your retirement (in this way it is the same as any pension investment).

Assuming that you need the cash and that your home is a large untapped asset, the real decision is:

Are the higher interest rates on a reverse mortgage (at least compared to 'normal' mortgages or a Home Equity Line Of Credit) worth absorbing to get all the benefits of the product (keep your home for life, can't lose your home, don't have to qualify it and no repayments required)?

No single article is going to make this choice for you.  In the end you need to weigh the pros and cons listed here to decide if a reverse is a good option for you - the guide linked to right at the start should also help.