The reversed mortgage is used primarily by retirees who own their principal residence and want to increase their retirement income, or simply cash out a portion of their property value for personal needs. The reversed mortgage can also be used when customers do not wish to cash their RRSPs or investments right away because the return is better. Only one bank in Canada offers this type of financing: Home Equity (CHIP).

The product registers as a mortgage and allows an equity take-out of a maximum of 50% of the property value. The money can be received in installments or in a single lump sum. The principle of a reversed mortgage is to have no monthly obligation in order to maintain the borrowers’ budgetary structure. Interest is compounded monthly but deferred and added to the borrowed capital.

The cost of borrowing will therefore be absorbed at the end of the term of the loan through refinancing, but in general, with the sale of the property, or by the estate. The two disadvantages of this type of financing are the costs associated with the loan process and the interest rate significantly higher than the different mortgage products.

There are other products on the market that allow for similar strategies, with very important benefits on the savings compared to the reversed mortgage. For example, a refinancing with a multi-segments product; the rate on the line of credit will usually be around 3.5%* but through an effective combination, the financing can be optimized by a flexible product where every year, the used portion of the line of credit will be transferred to a mortgage at more advantageous rates (for example, a variable rate at prime minus a bank discount.)

The advantages of this combination are the minimal account operating costs and the low interest rates, which make it the best option by far.

The downside is that the customer is required to pay a minimum monthly payment that will increase with years. For customers who don’t want a monthly payment obligation on the line of credit, there is another solution but the product will contain some restrictions and involve a monthly fee, which can represent a significant amount over the years.

The reversed mortgage comes in different forms and several variants, each with their own advantages and disadvantages. Is it dangerous? Obviously, such a strategy encumbers the capital that people usually want to leave to the heirs. However, this tool allows optimizing the retirement income and reduces the income tax impact by minimizing the monthly RRSP withdrawals through additional income generated from your home equity.

For optimal results, it is important that you discuss your wishes, your beliefs and your goals with your financial security advisor or your financial planner. Your financial planner will be able to work together with a mortgage broker to find the best mortgage option for you.

*average rate

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