Home sale vs. reverse mortgage

Owning an expensive property doesn’t guarantee you financial safety over your entire life.

Homeowners, who don’t have sufficient retirement income often face a difficult decision: should they sell a beloved home or transform it into an income source.

One of the options is taking out a reverse mortgage. This product can help them keep their usual lifestyles without selling a property. However, it’s a difficult choice.

As you know, with a standard mortgage you need to make payments building equity in your home. Meanwhile, a reverse mortgage lets you borrow from that home’s value and make payments (or not, it depends on you) over the loan term.

The latest data points to a growing demand for reverse mortgages. HomeEquity Bank (one of the two regulated providers of reverse mortgages in Canada) has revealed the value of its portfolio for this product – it has exceeded $5 billion for the first time on record.

A standard reverse mortgage lets homeowners access up to 55 % of the current value of their primary residence in a new loan. In some cases, a slightly larger share is available.

“For instance, a 55-year-old borrower could receive 15%, while an 80-year-old could get 55-59%,” – noted Paul von Martels, executive vice president at Equitable Bank in Toronto, Canada’s second regulated reverse mortgage provider.

In order to receive a reverse mortgage a borrower and everyone listed on the home’s title must be at least 55 years old. When your application is approved, you can either take out money as a lump-sum payment or cut it into several payments.

When it comes to repayment, you can choose one of the following options: interest-only payments, payments aimed at both interest and principal, or repayment of the entire amount in case of a sale, moving or death (the last one transfers your debt to your heirs).

In addition to it, reverse mortgages provided by regulated lenders guarantee that you will not have a negative equity.

Benefits of home sales and reverse mortgages

Deciding to access equity in your home is a serious change, so it’s important to know all the pros and cons.

Benefits of selling

According to the Canadian Real Estate Association, average housing prices in Canada keep breaking records.

In case your realtor, mortgage broker or financial advisor believe you can make a good profit from selling, it could be true.

Benefits of getting a reverse mortgage

A reverse mortgage allows you to keep a valuable asset growing in value.

People often don’t want to sell their home, as they are valuable for them not only financially. They can be happy with their neighbourhood, or they have lived there for so many years and spent a lot to improve it.

Moreover, it could be much easier to get a reverse mortgage than a refinance or line of credit. The deal is that banks are not eager to extend a loan to an 80-year-old homeowner who’s hardly making ends meet.

The risks of home sales and reverse mortgages

Of course, both options have their risks.

Disadvantages of selling

According to housing experts, a home sale often is not as profitable as clients expect.

A significant problem is the future after a sale is made. Where should you go? Yes, you can get a huge sum for your home, but you’ll need to spend also a huge sum for another property or for many years of renting a home, and the rent has also risen drastically.

In addition to it, there’s a chance you’ll need to pay off your existing mortgage from the proceeds of the sale. In case it happens before the end of your mortgage term, you may be charged with a prepayment penalty.

And the main issue is that a sale is final. You will not have an appreciating asset anymore, and there won’t be a property for your heirs.

Disadvantages of a reverse mortgage

Industry specialists say that many homeowners worry about losing a part of the proceeds in case a home is sold after the reverse mortgage is received.

For instance, you got a $500,000 reverse mortgage at 4.5%. You didn’t make any payments during ten years, so your debt is about $780,000. Meanwhile, your property’s appreciation at the rate of at least 3.5% per year during the same period not only offset the interest, but also increased a net equity amount.

At the end of the day, it’s quite a difficult decision, so we highly recommend consulting a professional.