Mortge on your terms - a pause in payments that can last forever
Mortgage alphabet
With the current economic uncertainty, a weak job market, and rising gas and grocery prices driven by conflicts and wars in various parts of the world, more and more Canadians find themselves at a crossroads, worried about their financial future. We're increasingly receiving inquiries about the possibility of temporarily pausing mortgage payments or refinancing an existing mortgage to lower monthly payments.
Withdrawing money from investments (if you have any) or selling your home today isn't always the optimal solution, given stock market volatility, a weak real estate market, and the challenge of requalifying for a mortgage afterward - even if you're willing to downsize into a cheaper, smaller home.
Banks and innovative financial companies aren't standing still, and they're bringing new products to market that allow borrowers to take out a mortgage without making monthly payments for 1 to 5 years, or in some cases, without making any payments at all until the property is sold.
Today we want to touch on two such products: an open mortgage with a term of one to five years that requires no monthly payments, and a reverse mortgage, available to borrowers aged 55 and older, with no such five-year limit.
Until recently, mortgages with no monthly payments and accruing interest were available to Canadians aged 55 and older only in the form of reverse mortgages. Today, however, several tech-driven innovators in the financial industry have begun offering similar products with no age restrictions at all.
If you have enough equity in your home and either find it difficult to keep up with mortgage payments right now, or need additional funds without monthly payments for the coming year or few years, you can take out this type of mortgage and improve your cash flow until circumstances improve. For example, say your home isn't selling because of a weak market and you don't want to give it away at a bargain price, but making payments is difficult - in that case, you can take out an open mortgage with no payments, and then, a year or two later, sell in a better market and pay off the mortgage plus the interest that has accrued. Consolidating debt or accessing funds for unexpected expenses, with the ability to defer payments until your financial situation improves, is a common use case for a no-payment mortgage.
Another common use for this type of open mortgage is accessing the equity in your home to grow a business or invest in a startup, during a period when you need time to get things off the ground and every dollar counts.
Helping children or grandchildren with a down payment on their first home is also a popular option among those who choose this type of mortgage today.
Every credit product has its own nuances and limitations, so we recommend speaking with a professional mortgage broker to review your specific situation and get further information about a no-payment open mortgage.
Now let's talk about the reverse mortgage, available to homeowners or buyers aged 55 and older. Today, older homeowners are facing particular hardship - those who didn't manage to pay off their mortgage before their income declined, or who now need additional funds to maintain a decent standard of living or cover other unexpected needs.
According to surveys, nine out of ten Canadians want to spend their retirement years comfortably in their own home, and a reverse mortgage is increasingly the tool used to make that possible.
While a traditional mortgage requires you to make payments and build equity in your home as you pay down the principal, a reverse mortgage lets you access money from the value of your home without making payments (or, if you choose, paying only the interest) for the duration of the loan.
It's no surprise, then, that more and more older homeowners are turning to reverse mortgages, which allow them to draw tax-free equity out of their homes to support themselves in retirement.
Once homeowners reach the minimum qualifying age of 55, setting up a reverse mortgage is fairly straightforward.
This product allows homeowners to access the equity that has built up in their property through price appreciation and mortgage principal repayment. That equity can be accessed either as a lump-sum, tax-free payment, or as monthly payments to help maintain a comfortable standard of living.
Reverse mortgages are structured so that the total debt can almost never exceed the value of the home - and if it ever did, that risk falls on the bank, not the homeowner, who is never left owing money. A reverse mortgage balance is typically repaid when the property is sold, when the owner moves into a retirement home, or when the heirs sell the property after the owner's passing.
A real-life example: Natalia and Pavel (names changed), both 65 years old, were deeply worried about carrying debt. Their Registered Retirement Savings Plans (RRSPs) were fairly modest, and although their home had appreciated significantly in value over the past several years, they still had to keep making mortgage payments. On top of that, a couple of years earlier Pavel had taken out a loan to buy a car, and, taking advantage of the low interest rates at the time, Natalia and Pavel had used their line of credit to pay for their younger daughter's university education. Since then, interest rates rose sharply, and the financial stress on the family intensified. To make ends meet, Pavel decided to keep working until they had fully paid off the mortgage, the car loan, and the line of credit. The only problem was that this could take years - years that Natalia had hoped to spend with her husband in retirement.
We advised this couple to take a different approach to their debt - specifically, to use a reverse mortgage. That turned out to be exactly what Natalia and Pavel were looking for. And while a reverse mortgage does carry its own interest rate, its main advantage is that there are no required monthly payments.
Reverse mortgages have existed in Canada since 1986, yet there are still plenty of myths and misunderstandings surrounding them. Below, we want to answer some frequently asked questions about reverse mortgages.
Will my debt exceed the value of my home?
You keep all of the equity remaining in your home. Years of experience show that more than 99% of homeowners have money left over after the loan is repaid.
Will the bank become the owner of my home?
Just as with a regular mortgage, you remain the owner of your home. You will need to keep up with your property tax payments, maintain home insurance, and keep your home in good condition.
Can I get a reverse mortgage if I don't have a steady income or have poor credit?
Information such as credit history or proof of income is not required to qualify for a reverse mortgage.
Is a reverse mortgage considered a desperate move or a last resort?
Some retirees do use this product to pay off other debts. At the same time, a reverse mortgage can be a highly flexible tool, also used to boost monthly income, pay for home care, cover unexpected expenses, reduce taxes as part of tax planning, purchase a vacation or investment property, or help children, grandchildren, or other family members with a down payment on their own property or other projects.
What if I can't afford regular payments?
As long as you're living in the home, you don't need to make any monthly payments. You're only required to repay the debt if you move out or sell the home.
What if I already have a mortgage?
Many of our clients use a reverse mortgage to pay off their existing mortgage or settle other debts in order to eliminate their monthly payments.
No-payment open mortgages and reverse mortgages are excellent tools for certain categories of Canadian homeowners. And while these products are similar in that neither requires monthly payments, they differ from each other in a great many ways. We've worked directly with banks offering reverse mortgages for many years, and we've built close working relationships with lenders offering innovative no-payment open mortgages. We're happy to answer all of your questions and help arrange these mortgage products, bringing in all the necessary specialists along the way.