Reverse Mortgages offer Canadian seniors a tremendous opportunity to tap into existing equity to help reduce day to day cash flow issues. The rates for this are higher than a traditional mortgage but this doesn’t mean it is necessarily a bad thing. Let’s look at the actual numbers and what they mean.
As of the writing of this article, the going rate for refinancing a conventional mortgage is 3.79% on a 5-year fixed mortgage and 6.49% on a Reverse Mortgage.
Qualifying for a conventional mortgage you need to have enough monthly income to qualify according to new federal guidelines at the contract rate + 2% (5.79%). You will need good credit and end up being responsible for monthly payments. If you are considering a Reverse Mortgage, it’s likely that you either are trying not to have monthly payments or do not qualify for a conventional mortgage based on your income.
Because of the way these loans are structured it is not easy to compare them apple to apple as making payments versus not making payments is difficult to equate. But for the moment let’s say both loans required repayment and you were allowed 15 years to repay them (the average time before a Reverse Mortgage is repaid is 14 years).
If you borrowed $100,000 at 3.79% your monthly payments would be $727.74. Your payments based on 6.49% would be $865.84. Although the interest is almost twice as much, the monthly payment is only $138.10 higher. Yes, you are paying higher interest, but the net result is that drastic.
The question becomes is it worth $138.10 per month to have ZERO payments until you are ready to pay off the mortgage in 14 years from now?
If you would like to discuss this in greater detail, please do not hesitate to reach out.