Reverse Mortgages – Impact on Heirs
September 9, 2020 | Posted by: Matthew Gottfried
How do Reverse Mortgages Affect Canadian Heirs?
For Canadian seniors, there is a great way to get the most out of the equity in their homes. Home prices tend to rise, and equity builds in the property. Homeowners can use their equity by accessing various types of home equity loans like home equity lines of credit (HELOCs), refinancing or second mortgages, and reverse mortgages. Some of the factors that determine the type of home equity loan that should be accessed include age, credit history, present earning capacity, nature of monetary requirement – short term or long term, an existing mortgage on the property, and health of the homeowner. Senior homeowners above the age of 55, with equity in their property, can opt for a reverse mortgage. The terminology of Canadian reverse mortgages can frighten some into thinking that, should they engage in a Canadian reverse mortgage, they threaten any inheritance that might be left to their spouse or children. However, Canadian reverse mortgages are an excellent way to improve liquidity and help secure a future inheritance
Understanding Reverse Mortgages in Canada
Simply put, a reverse mortgage is taking a loan on the equity in the home. A couple can take out a reverse mortgage loan on this equity and thus have money for expenses or other needs. This can be very useful for seniors since the income from a reverse mortgage does not have any impact on Old Age Security – OAS or Guaranteed Income Supplement – GIS benefits or income from their RRSP -Registered Retirement Savings Plan nor is the income taxable. In addition, there are no loan payments to be made for the duration of the loan and the occupants maintain the ownership of the property. The loan money can be dispensed in different ways, depending on desire or need. Loan money from a reverse mortgage can be received as a lump sum, or in subsequent installments. This gives a great deal of versatility to the money from the loan. In situations where there are two spouses party to the reverse mortgage, if one passes away, the other still can maintain residency and ownership of the home.
Loan Maturation of Canadian Reverse Mortgages
Understanding what a Canadian reverse mortgage is, is only part of the equation. Reverse mortgages mature when the homeowners no longer occupy the residence. This can be due to one or both parties passing away, selling the property, or moving to an alternate residence. When these situations occur, the loan reaches maturity with all interest included and the loan is due. Many times, the loan provider will specify a time to settle the estate to ensure the heirs have time to arrange for funds to settle the reverse mortgage repayment if they so wish. Normally, the estate is sold to retrieve the reverse mortgage principal and accrued interest. Funds remaining post settlement of the loan are turned over to the estate.
Direct Benefit to the Heirs
Unlike US citizens, Canadian reverse mortgages are highly regulated in terms of both the borrower and the loan originator/provider. A living spouse is allowed to continue to occupy the property for the duration of their life or until they are no longer able to occupy the property. They are not required to make payments nor service the loan in any way. Additionally, they cannot be forced to sell the home until they no longer occupy the property. As long as all necessary upkeep such as taxes is taken care of, there are no concerns with the Canadian reverse mortgage.
Beneficiaries and or children who are entitled to the estate are given the option to settle the reverse mortgage, or else the home is sold to satisfy the reverse mortgage loan. As mentioned previously, home prices tend to rise over time. Any monies left over from the sale of the home and, after the loan and interest are satisfied, are returned to the heirs. While various factors can affect the amount of money returned to the estate, the typical amount is 50 percent of the value of the home. Part of this is because the total amount of the loan is limited to a percentage of the equity secured as collateral.
Protection For Both Seniors and Heirs From Financial Uncertainty
One less obvious aspect to a Canadian reverse mortgage is the fact that it helps prevent, in some cases, financial insecurity brought on by a loved one passing away. In many cases, children of the property owners who engage in a reverse mortgage have homes and residences of their own. Those heirs who don’t possess their own properties have the option of repaying the reverse mortgage and its accumulated interest and retaining the home. Alternatively, they can use the remaining proceeds from the sale of the property to invest in a home of their own or handle any immediate financial needs. For seniors, a Canadian reverse mortgage is a way to supplement a fixed income and provide security to their heirs.
Many times loved ones and future beneficiaries approve of the use of a reverse mortgage. While the exact reasons may vary, the fact that the seniors have financial security and the heirs are considered and assured, help children understand the benefits of their parent undertaking a reverse mortgage.
Canadian Reverse Mortgages are not for everyone and they are certainly not a solution for all financial problems. For those, who would benefit from a reverse mortgage, however, they can make the difference between financial security and financial calamity. A CHIP Reverse Mortgage is great for giving seniors, who have equity in their home, the peace of mind that their financial well-being is assured, and their children or beneficiaries are still taken care of.