Reverse Mortgages

What is a Reverse Mortgage?

A reverse mortgage is also known as an “equity release” – as this is exactly what it does. It releases the equity you have built up in your home via a loan, thereby providing you with immediate cash in hand. This loan is secured against the property in question and is a “life” loan, meaning it lasts the duration of the borrower’s lifetime (or the life of the borrower’s ownership of the home).

Unlike with a standard mortgage, there are no monthly repayments; you do not have to pay back the principal of the loan, or any interest, until the loan terminates. As such, the loan accrues value over time – as opposed to a standard mortgage, which grows smaller over time. The loan ends when you leave the home, sell it, or when you die – at which point, the sale of the property covers the loan repayment.

Why Do People Use Reverse Mortgages?

Reverse mortgages are very useful tools if you have built equity in your home but lack regular income. The funds released via a reverse mortgage are tax free, so there are literally no payments to worry about until the home is vacated.

There are no restrictions on how you can use funds from a reverse mortgage, but there are some common uses:

• Utility bills and other regular expenses

• Travel expenses

• Home renovations

• New purchases

• Medical and care bills

• Paying off other debt

• Bridge financing until a pension kicks in

Who Can Get a Reverse Mortgage?

Eligibility for a reverse mortgage is simple:

• You must be aged 55 or over (if another person is listed on the property title, they must also meet this age requirement)

• You must own your own home in Canada, and it must be your primary residence

If you meet these basic requirements, you are eligible for a reverse mortgage, but other factors will be taken into account to determine whether a lender will approve you. These factors include:

• Your age
• Your home’s location

• Your home’s condition
• The amount of equity you have in the property

• The type of property (e.g. condo, detached home, etc.)
• The home’s appraised value

These factors influence your likely approval and how much you will be able to borrow via a reverse mortgage. The maximum allowed borrowing amount is 55% of your home’s value.

Where Can I Get a Reverse Mortgage?

At the moment, there are only two reverse mortgage providers in Canada:

1. HomeEquity Bank (CHIP) 

• Available throughout Canada
• Most widely used reverse mortgage provider
• Private corporation active since 1986
• Requires that home in question is valued at more than $150,000

2. Equitable Bank

• One of Canada’s ten largest banks
• Reverse mortgages only available in select major urban areas
• Require the home in question to be worth more than $250,000
• Minimum borrowing amount of $25,000

This lack of providers does mean that there is less competition in this space than in other areas of financing, and so interest rates are higher than with traditional mortgages and some other types of loan.

How Does a Reverse Mortgage Work?

Getting a reverse mortgage is an easy process with just a few simple steps:

Step One: Pay off any other outstanding debts on the home (such as HELOCs or other mortgages). You may use the reverse mortgage to help you cover these debts – the key is that, when in place, the reverse mortgage is the only loan against the property.

Step Two: Apply for a reverse mortgage with your chosen lender. They will want to see personal information, financial documentation, and documentation pertaining to your home.

Step Three: Decide how you want your reverse mortgage funds. You can opt for either a single lump sum payment, or a small amount upfront, followed by monthly payments. Interest accrues on the loan amount as it is received, so opting for monthly payments means less interest over the life of the loan.

You also have the option, if you so choose, of repaying the loan in partial payments over time. If you do not do this, and choose to wait until the mortgage closes, you should know that the amount owing at the end of the loan’s life will be greater than the amount initially borrowed (because of the interest).

What’s the Effect of Changing Property Prices?

All of the above probably has you wondering what happens as the value of your home fluctuates with the property market. There are reverse mortgage calculators available to give you a more specific picture, but essentially you only need to be aware of two scenarios:

1. Your Property Value Increases

If this happens, your reverse mortgage is not affected. The only effect of an increase in property value is a change in the amount of equity you have in the home. As the property value increases, the proportion of the property mortgaged becomes smaller, and so your share of equity increases. However, over time the amount of interest accrued on the reverse mortgage also increases, making the loan larger. So the crucial number to consider is the difference between the rate of your home’s appreciation and the interest rate on your mortgage.

2. Your Property Value Decreases

If property prices take a tumble (or if property prices are stagnant and your mortgage’s interest accrues past the value of your home), you may be concerned about repaying your loan. Reverse mortgages usually come with a negative equity guarantee: if, when the mortgage is closed, you owe more back than the home is worth, you (or your beneficiaries) are protected from this shortfall. You will never have to repay more than the fair market value of your home.

Reverse Mortgage Rules and Requirements

Once you have a reverse mortgage on your home, there are rules you must follow to stay in line with the loan’s stipulations. These are:

• Live the house as your primary residence
• Pay all applicable property taxes
• Maintain insurance on the home
• Keep the home in a good state of repair
• Avoid using the funds from the reverse mortgage for illegal activities

If you fail to meet any of these conditions, you will default on the loan.

Closing a Reverse Mortgage

There are a couple of ways to close a reverse mortgage:

• When the homeowner(s) die
• When the homeowner(s) sell the home

• When the homeowner(s) choose to repay the loan, but remain in the home
• When the homeowner(s) vacate the property (e.g. to go into long term care)

The amount of time you, or your estate, have to repay the loan varies by lender and circumstance.

Reverse Mortgage Fees

As with any mortgage, there are fees when taking out a reverse mortgage. These should be included in your financial calculations, and if necessary added to the loan amount. Typical fees include:

• Legal fees

• Appraisal fees

• Administrative fees

• Early prepayment fees

It’s recommended that you budget around $2500 to cover these costs.

Pros and Cons of Reverse Mortgages

Pros

• No monthly payments
• Tax free cash
• No transfer of home ownership
• Stay in your own home
• No income requirements
• Does not affect benefits (like OAS)
• Usually come with a negative equity guarantee

Cons

• Interest rates are higher than for other loan types
• Interest accrues quickly
• Limited choice of providers
• Some fees apply, increasing the cost of the loan
• Impacts your estate’s beneficiaries if the loan is repaid after your death

Frequently Asked Questions About Reverse Mortgages

How much does a reverse mortgage cost?

This depends on the loan you take out – the amount and interest rate, as well as the lender’s fees; it also depends on how long you have the loan for. The longer the loan lasts, the more interest it accrues, hence costing you more.

What kind of home can I get a reverse mortgage on?

Reverse mortgages can be taken out on any privately owned home, as long as it meets the lender’s criteria (usually a minimum value of $150,000), and as long as it is the borrower’s primary residence. If the property has multiple owners, then all of the owners must meet the lender’s requirements.

How much can I borrow with a reverse mortgage?

The amount you can borrow with a reverse mortgage depends on the value of your home; the upper limit is 55% of the home’s value.

Who owns my home when I take out a reverse mortgage?

You still own your home when you take out a reverse mortgage; just as with a traditional mortgage, the loan does not impact your ownership. The loan is simply secured against the property.

Will a reverse mortgage affect my benefits?

No, reverse mortgages do not affect benefits, as income from a reverse mortgage is tax free.

If my spouse dies, what happens to our reverse mortgage?

If you own your home with your spouse, the reverse mortgage is maintained after they pass away. For the reverse mortgage to close, both spouses need to pass away or vacate the home.

How will a reverse mortgage affect my children’s inheritance?

This depends on how the reverse mortgage is closed. If you close it or repay it prior to your death, then it will have no more effect than repaying any type of loan. If the reverse mortgage is automatically closed after you pass away, then your estate repays the loan. This naturally reduces the sum of money left to your beneficiaries, but rest assured: if property prices fall, they will not be stuck paying the cost of your loan out of pocket.

Written By Smarter Loans Staff