This is what our financial person sent to us when we asked about it. Keep in mind we are in Canada so there may be some differences. We don't have any kids, so when we were making our wills we kind of got thinking about the reverse mortgage because we really don't care if there is anything to leave to our siblings and nieces/nephews. We don't owe them anything. Anyway, here is the info:
While we are happy to provide general information on reverse mortgages, we would recommend your client consult with an accountant and/or lawyer for advice on their specific situation.
A reverse mortgage is a loan secured against an individual's primary residence, but (unlike a traditional mortgage or Home Equity Line of Credit) does not require regular payments. Interest accrues and is added to the balance of the loan on a regular basis.
How a reverse mortgage works
To be eligible for a reverse mortgage, all the individuals listed on the home's title must be at least 55 years old. The home used to secure a reverse mortgage must be the applicant's primary residence. This usually means the homeowner(s) must live in their home for at least 6 months a year.
There are two financial institutions that offer reverse mortgages in Canada. HomeEquity Bank offers the Canadian Home Income Plan (CHIP), which is available across Canada. A reverse mortgage can be applied directly from HomeEquity Bank or through mortgage brokers. Equitable Bank offers a reverse mortgage in some major urban centers.
Before getting a reverse mortgage, any outstanding loans or lines of credit that are secured by the home must first be paid off and closed. These can include a mortgage and a home equity line of credit (HELOC).
Depending on the homeowner(s)'s age, and the location, type, condition and appraised value of their home, eligible homeowner(s) can access up to 55% of the equity in their home. Proceeds of the loan are tax-free and can be taken in one lump sum or multiple advances.
Homeowners that have a reverse mortgage don't need to make any regular payments on a reverse mortgage. However, they have the option to repay the principal and interest in full at any time. However, the lender may charge a fee if they pay off their reverse mortgage early.
Homeowners generally have to repay the amount of the reverse mortgage left owing when:
they sell their home
they move out of their home
the last borrower dies
they default on the loan
Each reverse mortgage lender may have their own definition of defaulting on a reverse mortgage so it important to check with their lender for details.
Costs associated with a reverse mortgage may include:
a higher interest rate than for a traditional mortgage
a home appraisal fee
a setup fee
a prepayment penalty if they pay off their reverse mortgage before it is due
legal fees for closing costs or independent legal advice
It is important to weight the pros and cons when considering a reverse mortgage. Here are some of the things you may wish to consider (not an exhaustive list):
homeowner(s) don't have to make any regular loan payments
they may turn some of the value of their home into cash, without having to sell it
they don’t pay tax on the money that's borrowed
this money doesn’t affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
homeowner(s) still own their home
homeowner(s) may have options as to when and how they receive the money
interest rates are higher than most other types of mortgages
the equity they hold in their home may go down as the interest accumulated on the loan
the estate has to repay the loan and interest within a set period of time when they die
the time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage
there may be less money in their estate to leave to their children or other beneficiaries
costs associated with a reverse mortgage may be higher than a regular mortgage or other credit products
Incorporating a reverse mortgage into client's retirement plan is a complex tax and estate planning strategy and we are not in a position to provide specific advice on it. We would recommend your client consult with an accountant and a lawyer to fully understand how a reverse mortgage can affect their home equity and their overall financial position over time before making any decisions.