After retirement, with kids no longer at home, a big house may be rich in memories and equity, but it does little to help pay the bills when money is tight. Enter the reverse mortgage. Essentially homeowner borrows lump sum to purchase an annuity which usually provides monthly payments for life, even after home is sold and mortgage is paid. Compound interest is charged on lump sum. Borrowers take what they need, often to a maximum annual amount.
Interest is calculated on the total amount and the accumulated interest from previous years.
Interest builds on the money for the set period of time at the end of which the full amount plus interest is due. This works well for people waiting for an investment to mature or for a pension to begin. But if you can't repay the loan at the end of the term, you will have to take out a standard mortgage or sell your home. This controversial financial tool, introduced to the Canadian market a decade ago, gives people a chance to turn the equity from their homes into cash without having to sell. Unlike a regular mortgage, where the loan gradually decreases as the equity increases, the amount owed on a reverse mortgage increases while the equity decreases.