A Reverse Mortgage – An Easy Way Parents Can Help Their Adult Children Buy a Home
A reverse mortgage is a financial instrument that retirees can use to tap into the equity of their home, to help pay bills or gift to their adult children for large ticket items such as a wedding or a home down payment.
High property prices have made it virtually impossible for younger families to purchase a home. Many have parents who own equity free homes, which will eventually be bequeathed, to them. These inheritances sometimes come at a time in an adult child’s life when most of the major expenses such as buying a home and their children’s education will have been dealt with, in many cases, at a considerable debt burden.
Parents just don’t have the cash to pass on to their children for a down payment, as what they have amassed in savings will be used to get them buy during their retirement – the average Canadian senior has just $180,000 in their RRSP.
So a good way that parents can help their children in the present, without risking their retirement or selling their home, is by using a reverse mortgage. A reverse mortgage allows the owners of the home who are 55 and over, to tap into up to 55% of the equity of the home for borrowing purposes. This money is released tax free, requires no monthly payments, allows the owners to maintain ownership of their home and needs to be paid back when the owners sell, move or pass away.
Pros of a reverse mortgage
- there is no income verification required
- there is no need for monthly regular payments
- the loan is paid on death or sale of the home
- there is no tax on the borrowed money
- there is no interruption of government benefits
- there is no restriction on how the funds are used
Cons of a reverse mortgage
- the loan can reduce a substantial portion of the home equity
- the loan and interest has to be paid within a set period of time after death or sale of the home
- prescribed interest rates tend to be higher than a traditional mortgage or other credit products
- there are initial upfront costs such as origination fees, closing and insurance costs
- there are ongoing costs such as interest, loan servicing fees, an insurance premium and other property charges
In practice, most lenders will want to see borrowers having at least 50% equity in their home before they apply. To keep the loan in good standing, the homeowner must pay all the insurance premiums and property taxes when they are due.
If you are selling or wanting to buy your dream home, make sure you contact us or call us on 604 913 1000. One of our experienced real estate advisors will only be to happy to assist.