It’s no secret that seniors in Ontario are borrowing from their homes in their retirement. Reverse Mortgages have become popular as a new source of income and with record breaking real estate values it is little wonder why. Calculating this mortgage isn’t easy though. Let’s see how the numbers add up for you.
Why Is Understanding The Math Important?
So you are not the type of person who just sends their information over the internet without being 100% sure you are satisfied. I get it. Understanding the principles of a Reverse Mortgage will validate your assumptions and help you take the next step.
There is a veil of secrecy held by those who provide this service in Canada. Reverse Mortgage Calculator searches provide little and less actual results towards truly understanding this mortgage product and the math. Or you end up on US websites that have information that isn’t relevant to you.
Unfortunately, this may be on purpose due to the conclusions (you may also come to) about the realities of the Reverse Mortgage.
Learn more about all the things you need to know about Reverse Mortgages.
Reverse Mortgage Simple Calculations
I have found the answer to most Ontario homeowner’s math questions lie in understanding the concepts that guide Reverse Mortgages. There are variables we won’t address (age, property type, location) however I believe these simple examples will help to validate your train of thought.
- Initial Lump Sum Calculation – You’ve decided to take a Reverse Mortgage and want the whole amount you borrow up front (less any existing mortgage).
Example: Your home is worth 600K and you are eligible to borrow 180K. Your interest rate is 4.24% and you are borrowing for 5 years. Over this time you will have accumulated $42,449 in interest and the loan owing will now be $222,449.
- Additional Advances Calculation – You’ve decided to take a Reverse Mortgage however you only need some of the loan up front and want to take some as income over time.
Example: Your home is worth 600K and you are eligible to borrow 180K. Your interest rate is 4.39% and you are borrowing for 5 years. You take 100K up front and want the remaining 80K in monthly amounts. You will receive $1,333 monthly until the five years are over.
As you are taking part of the borrowed amount over time you have accumulated less interest. In this example $33,794 and your loan owing after 5 years will be $212,448.
Although there are many variables, look here to find a Reverse Mortgage Estimator that will help guide our discussions.
The Reverse Mortgage Numbers Don’t Lie
If you have been following along to this point you will notice a trend. The balance of the loan accumulates over time. Although this may be offset by rising property values there are no guarantees there.
What is less obvious is that if you decide to not make your minimum interest payments that you will be paying interest on top of the interest you are accumulating.
Example: Your home is worth 600K and you are eligible to borrow 180K. Your interest rate is 4.24% and you are borrowing for 5 years. Over this time you will have accumulated $42,449 in interest. What hasn’t been pointed out is that $4,622 of this is interest paid on top of the actual interest of the loan.
So let’s not enter this brave new world without understanding how Reverse Mortgages are calculated. Find a Mortgage Agent that is unbiased enough to show you behind the veil of secrecy and explains the numbers in easy to understand concepts. This is my goal with my senior clients.
And now my hope is that the math has become a little clearer and that this will inform your decision towards your best mortgage made easy. Prevent costly and potentially embarrassing mistakes by reaching out to me today.