A reverse mortgage is a loan against the homeowner's accumulated home equity that requires no repayment for as long as the person or his or her surviving spouse or common-law partner lives in the home. The homeowner mortgages part of the value of the home, receiving the proceeds as cash or a line of credit or as an income-producing annuity. But instead of making monthly payments on the principal and interest owing under the mortgage, the interest is allowed to accumulate.

The borrower continues to own his or her own home and is fully responsible for property taxes, fire insurance premiums, condominium maintenance fees, maintenance and repairs of the property. Title to the property remains in the homeowner's name and the owner retains the right to decide when to move and when to sell.

The loan plus interest is paid back when the borrower dies, sells the home, or permanently moves out of the home. Because the borrower makes no regular payments, the amount owed grows larger over time.

Estate Planning

In the case of a couple, when one spouse dies, nothing changes. Upon the death of the surviving partner, the home becomes part of the estate in the usual manner and the estate repays the loan as it would repay any other outstanding debts. If the senior is a single homeowner, the home becomes part of his or her estate when he or she passes away and the full amount due on the reverse mortgage is paid by the estate.

The homeowner may leave the home as a gift to a beneficiary through a will. However, the beneficiary then becomes responsible for repaying the full amount due on the reverse mortgage. This amount can be repaid from other funds in the estate or by a traditional mortgage or other type of loan, or by any other means that the beneficiary chooses.

The loan amount to be repaid is guaranteed not to exceed the fair market value of the home at the time it is sold. In the event that the net proceeds from the sale of the home are not enough to repay the reverse mortgage in full, the repayment is limited to the amount received from the sale of the home. If the proceeds from the sale of the home exceed the balance on the loan, the estate retains the excess.

Eligibility Requirements

You must be 60 years of age or over. If you own your property with a spouse, both of you must be 60 or over.

You can receive up to 40% of the value of your home. Currently, this can range from a minimum of $20,000 to a maximum of $500,000. The specific amount is based on your age and that of your spouse, the location and type of home you have and your home's current appraised value

The reverse mortgage must be registered as a first mortgage on title. Any conventional mortgage or other home-secured borrowing, including a secured line of credit, must either be paid off or moved into second place. The proceeds from a reverse mortgage can be used to retire these loans.

Interest

Interest is added to the outstanding balance and is compounded semi-annually. You have the option to pay all or part of the accrued interest once every calendar year. Fixed interest rates are available for six-month, one-year, three-year, or five-year terms. The variable rate option has no fixed term and is based on the current bank prime rate.

Proceeds

The proceeds from a reverse mortgage are a loan and not taxable income. As a result, the money has no impact on any income-tested government benefits, such as the Guaranteed Income Supplement, and it will not result in a higher income tax bill.

Costs

There is no cost for requesting a reverse mortgage estimate but, if you wish to proceed beyond an estimate, a fee is required to cover the costs of the appraisal of the home. You will also have legal fees. Before you sign the final reverse mortgage contract, you are required to obtain independent legal advice. Finally, there are closing costs, which are deducted from the proceeds at the time of funding and cover the costs associated with obtaining a mortgage, such as title insurance and registration on title.

Consider also that reverse mortgages are subject to higher interest rates than most other types of mortgages. Unlike traditional mortgages, you do not make any regular or lump-sum payments on a reverse mortgage. Instead, the interest on your reverse mortgage accumulates and the equity that you have in your home will decrease with time.

Before You Act

If you need cash and are considering a reverse mortgage, be sure to check all your options carefully and get professional advice. Remember the key to making the right decision is always good information.

Compare the current interest rates of a traditional mortgage versus those of a reverse mortgage. Consider other options, such as:

• More conventional sources of funds (e.g., a line of credit with the house as security or renting out part of your home);
• Selling the home and moving to a smaller home or rental accommodation. If you can free up some equity by selling your house, you may be able to invest the proceeds, live on the investment income and still have something to leave your children.

Get Professional Advice

Reverse mortgages are complex and binding financial instruments. Be sure to talk to your chartered accountant about the impact that your decisions will have on your retirement income, your lifestyle and your estate planning wishes.