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If you are a senior looking for a method to release some of the equity you have built up in a property, a reverse mortgage may be a reliable option.
However, there is a catch. If you were to consult the vast majority of lenders, they would all tell you that you can only get a reverse mortgage on your primary residence. As a result, investors looking to enjoy some of the hard-earned equity in their investments may consider turning towards other options.
However, what if it were possible? (Spoiler alert: It is and we have a lender who will do it)
So, before we get into the bulk of the article, if you want to see if you qualify for this type of financing on your investment property, stop what you’re doing and book a free strategy call with us today. Then, we can begin assessing you for the mortgage you want.
What is a Reverse Mortgage?
Before we look at the specifics of when you can and cannot get a reverse mortgage, let’s take a moment to analyze what a reverse mortgage is.
In essence, a reverse mortgage is a loan that allows homeowners to borrow money from their home equity without needing to sell the home. This is occasionally referred to as ‘equity release’ and can enable homeowners to borrow up to 55 per cent of the current value of their home.
These loans typically come with zero monthly payments, meaning that for as long as you are living on the property, you are not required to pay back the loan. However, the amount of interest owed on the mortgage does increase the longer you go without paying it back, meaning that you may end the term with less equity in the property than you started with.
I find that most of the time, this type of financing is used to draw equity of of a home that has been as a type of retirement savings plan. This way the residents can use the funds to ride out their retirement without making payments each month unlike they would need to do with some other forms of financing.
How Can You Qualify for a Reverse Mortgage?
In order to be considered eligible for a reverse mortgage in Canada, you must be 55 or older, a homeowner, and have significant enough equity in your property in order to borrow against it. Your reverse mortgage application must include all individuals on the home’s title, and they must all meet these same requirements.
You also are required to pay off any outstanding loans or lines of credit secured against the property in order to get a reverse mortgage. However, lenders may sometimes permit the reverse mortgage to be used as a tool to pay off these debts, making it a great vehicle for debt consolidation.
While this can be great for individuals, it can also be incredibly restrictive for investors who seek to use these for their investments because it often locks them out of other financing options for the property moving forward such as HELOC‘s, second mortgages or refinances.
When Do You Have to Repay a Reverse Mortgage?
Since you are not required to make regular payments towards your reverse mortgage, when exactly do you have to pay it back?
While you technically can repay a reverse mortgage in full at any time, paying it back early may come with fees and penalties.
Otherwise, you (traditionally) have to repay a reverse mortgage when:
- You Move Out of the Property
- You Sell the Property
- The Last Borrower Dies
- You Default on the Loan
You can default on a reverse mortgage by:
- Lying on Your Application
- Allowing The Property to Fall into Disrepair and Depreciate
- Using the Funds for Illegal Activities
- Not Following Your Mortgage Conditions
In the event that the last borrower on a property covered by this type of mortgage dies, there are usually one of three things that will happen.
The most common thing you will see is that the person who inherits the property will wind up selling the property in order to pay off the equitable interest the lender has in the property. However, sometimes the lender may repossess the property if it was not directly willed to someone or the remaining balance on the mortgage is too high.
Finally, in some cases, an inheritor may choose the pay off the mortgage directly in order to hold on to the property. This is especially common amongst family homes with plenty of history.
Can You Get a Reverse Mortgage for an Investment Property?
This brings us back to the question; can you get a reverse mortgage for an investment property?
Typically, the answer to this question is no. One of the key requirements for a reverse mortgage is almost always that you live on the property you are getting the loan against. This is also part of the reason that you can only get one reverse mortgage at a time, they are almost always limited to your primary residence.
However, there are unique situations that may allow you to get a reverse mortgage on an investment property. The most common situation is if you are renting out part of the property while living onsite. This is allowed by most lenders and is the easiest way to get a reverse mortgage on an investment property. It is important to note that some lenders may limit the reverse mortgage to only cover the part of the property you are living on. In a case like this, it may be better to pursue a different form of financing.
Alternatively, at LendCity, we have a lender that is capable of providing a reverse mortgage on your investment property regardless of whether you live onsite or not. (We will come back to this later.)
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Why Don’t Lenders Typically Allow This?
Why are lenders not able to provide a reverse mortgage for a rental property?
To put it simply, it is because reverse mortgage products are specifically designed for older homeowners. The intended use for these products is to allow people to utilize the equity they have already earned in a property in order to finance their retirement, make later investments, or make key improvements to their home that are designed to make life easier.
Most of the time, if you are looking to draw on the equity you have built in an investment property there are other options available to you instead of relying on a reverse mortgage. After all, in the vast majority of cases, there are likely other mortgage options on the market that may suit your investment properties better than a reverse mortgage would, so often you are not missing out on much.
However, if you want to assess your options and decide for yourself whether this financing option is best for you, feel free to book a free strategy call with our team and we will gladly help you get started.
Getting a Reverse Mortgage on an Investment Property
While it is not typically the solution that most people go for, if you would like to get a reverse mortgage on your investment property, there is a solution for you.
We have a lender that we work with – although we are not permitted to name them here – who can offer a specialty mortgage product that effectively operates as a reverse mortgage for your property regardless of whether they are your primary residence or a rental property.
This can be great if you are looking to take out equity from an investment property for renovations, purchases or even flips without massively impacting your month-to-month expenses. Notably, if you use these funds for flips, you may be able to complete the flip and pay off the mortgage before you accrue too much debt in the form of interest.
To learn more about this option, or to discuss alternatives for a reverse mortgage that may apply to you and your investments, give us a call at LendCity. Our expert team of mortgage professionals is ready to assess your needs and connect you with the best mortgage products from the best available lenders at the best available rates so that no matter your investment strategy, you are getting the experience you deserve.