What Inflation Means for Reverse Mortgages

iQuanti: With inflation surging in 2022, many retirees are looking for financially sound strategies to prevent rising costs from impacting their retirement plan. The Bank of Canada has reacted to inflation and other economic conditions by increasing their interest rates, with plans to continue increasing rates forecasted through 2023.

These challenging metrics mean changing conditions for senior retirees, especially when retirement plans were built pre-pandemic. 

To cover rising costs, seniors may be looking at financial solutions to weather the storm of a Canadian and global economy that threatens rising rates and escalating inflation. While direct withdrawals from retirement funds can disrupt the plan, a reverse mortgage becomes increasingly attractive, especially given the growing real estate market over the past few decades. 

How a reverse mortgage works

With a reverse mortgage, senior homeowners can borrow funds directly against the appraised value of their home. Unlike a conventional loan, a reverse mortgage doesn't include any monthly payments but allows the loan to be repaid when the borrower passes away, moves out, or the home is sold. This type of borrowing solution is available to Canadian homeowners age 55 and older and can be accessed as needed to support the need for additional income. 

Why inflation makes reverse mortgage conditions favourable

In Canada, reverse mortgages can allow homeowners to borrow up to 55% of their home's available equity. Prospective borrowers' limits depend on the age and location of their current home. If a homeowner still has some mortgage to be paid on the home, the reverse mortgage funds will go to paying that off first. 

In either scenario, the increasing cost of homes across Canada has likely increased the estimated appraised value of most homes, which means more funds are available to borrow for a reverse mortgage. 

Of course, a reverse mortgage will include interest charges against what homeowners borrow.

But if the cost-of-living expenses in today's economy threaten to reduce savings or retirement accounts for seniors, they can consider using home equity to secure funds that can deliver the life of comfort they had planned for their retirement years.

How reverse mortgages are repaid

While no monthly payments and additional cash to enjoy retirement - all while staying in your home - seems too good to be true, it's important to consider how the reverse mortgage will be repaid.

If the heirs agree to sell the home after the homeowner passes away, repaying a reverse mortgage (and its interest charges) will occur after the sale goes through, simply deducting the cost of the debt from the sale value of the home that is distributed to the estate's beneficiaries.

If, however, the heirs would prefer to keep the home after the homeowner passes, the heirs can repay the reverse mortgage within a 6-month grace period, whether they are using another lending product or their own savings. 

It is important when considering a reverse mortgage to talk through these details with family to ensure that the reverse mortgage can be managed responsibly after the homeowner passes away.

2022: strong equity borrowing options

Very simply, the more home prices rise, the greater the equity borrowing power of Canadians. This is just as true for younger homeowners as it is for those over the age of 55. However, Canadian seniors can get access to equity from their home through a reverse mortgage designed exclusively for Canadian homeowners aged 55-plus. This appealing borrowing option becomes even more pertinent for those frustrated by the rising cost of living and inflationary economy that threatens to persist.

To see if a reverse mortgage is a fit for a homeowner's needs, they should contact a trusted equity lender to see how a reverse mortgage can provide income stability within this fluctuating national economy.

Source: iQuanti, Inc.