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How Reverse Mortgages Work

 

What is a Reverse Mortgage?

–        A Reverse Mortgage allows a homeowner to access equity in their home while living in it.

–        Their home equity is used as collateral for a loan where, in some cases, the loan principle and interest becomes due on the homeowner’s death, or sooner if the individual sells their home.

–        The minimum age is 62 and the loan value ranges between 10% – 40% of the appraised value of their home.


There are 3 Common Types of Reverse Mortgages:

–        Reverse Annuity Mortgage:

  • Comprised of 2 parts:
    • A mortgage; and
    • An annuity.
  • The homeowner borrows a lump sum of money using their home equity as collateral. The loan proceeds are used to purchase an annuity which pays the homeowner a monthly income for the rest of their life.
  • The repayment of the loan is due at the time of the homeowner’s death, or sooner if they sell the home.

–        Line of Credit Reverse Mortgage:

  • The homeowner borrows a lump sum of money using their home equity as collateral. The loan proceeds are used to create a line of credit which the homeowner can borrow from when needed.
  • Debt repayment commences when the money is withdrawn from the line of credit.
  • This type of plan is valuable for people who require money at specific times and not on a regular basis.

–        Fixed Term Mortgage:

  • The homeowner borrows a lump sum of money using their home equity as collateral. The loan proceeds provides’ the homeowner with cash flow for a specific period of time, usually 5 to 10 years.
  • The repayment of the loan occurs at the end of the fixed term.
  • This is values for people who require cash flow on a regular basis for a short period of time.


Taxation?

–        Simple reverse mortgages and lines of credit are not tax-deductible since they are similar to a loan advance from a traditional mortgage.

–        When reverse mortgages are used for investment purposes the accruing mortgage interest is tax-deductible against any investment returns generated with the mortgage proceeds, providing individuals with tax-sheltered income.

–        While annuity income is taxable, annuity income generated from a reverse mortgage is not taxable.

 

 

*** Please note, a Reverse Mortgage may not be the ideal plan for everyone. There are certainly pros and cons, but for some people, it can be a feasible way to augment retirement income.

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