Term selection can significantly impact your reverse mortgage borrowing costs.
The most popular term is the 5-year fixed, but it also carries the highest interest rate.
A 1-year fixed, for example, can cut your rate by 0.60%-points, saving you roughly $600 in interest over the first year, per $100,000 borrowed. The tradeoff, of course, is that rates sometimes go up leaving you potentially exposed to higher interest costs.
Unlike a regular mortgage, however, there is no payment risk with a reverse mortgage. Rates could jump 10% and you’d never have to make 1 cent of payments. You’d simply end up with less equity remaining.
The trick with a reverse mortgage is minimizing your average borrowing cost over the expected term. For example, if rates:
You’d be better off in today’s 1-year fixed rate, even though rates spiked the first year.
No one knows where rates will be one year from now. But with the Bank of Canada ever-vigilant on inflation and with long-term disinflationary trends (the Internet, offshoring, aging consumers, overindebtedness, etc.) it makes less sense to overpay for long-term fixed terms.
If you save a significant amount (over 60 basis points) in a short-term fixed or variable, you will want to at least consider them.