Reverse Mortgage in Canada: Is It Right For You?
If you’re 55 or older and own a home in Canada, a reverse mortgage might interest you. With this, you can get up to 55% of your home’s current value as cash without having to sell or refinance your house.
Reverse mortgages have become quite popular among Canadians 55 years old and older. It’s a common method for them to tap into the equity they’ve built up in their homes.
Reverse mortgages offer financial flexibility and peace of mind, especially for retired homeowners with fixed incomes. However, before contacting a reverse mortgage lender and beginning the application process, there’s much to consider.
Reverse mortgage explained
A reverse mortgage refers to a loan that swaps home equity for cash.
With a reverse mortgage, a homeowner borrows money according to their current equity and repays it when the house is sold later on. It’s dubbed “reverse” because it depletes your equity instead of building it up.
When retired or older homeowners require cash, they usually have limited options, mainly if they prefer not to sell their home or rely on other investments for income. Refinancing to access equity might not work if their retirement income can’t cover new mortgage payments.
In such situations, a reverse mortgage can offer the needed cash while letting the homeowner keep ownership of their valuable property, which may increase in value over time.
What are the types of reverse mortgages in Canada?
Like regular mortgages, reverse mortgages also come in various types. When looking at options, you must decide between a closed or open agreement and whether you want a fixed or variable interest rate.
Different types of reverse mortgages also vary in how they distribute funds to you. Certain products provide the entire mortgage amount at once. In contrast, others offer a mix of initial smaller withdrawals and lump-sum payments, which can be accessed when needed or scheduled.
The CHIP Reverse Mortgage in Canada
The CHIP Reverse Mortgage is Canada’s longest-standing and most commonly used reverse mortgage. Introduced by Home Equity Bank as the Canadian Home Income Plan, it underwent a rebranding in 2014 to become the CHIP Reverse Mortgage. It remains a primary option among several reverse mortgage choices the company offers.
What's the Process for a Reverse Mortgage in Canada?
Reverse mortgages are typically straightforward. However, it’s crucial to grasp the eligibility criteria, interest rates, and the process of receiving and repaying the funds.
Requirements for reverse mortgage eligibility
While specific reverse mortgage products may have distinct criteria, eligibility requirements generally share commonalities. To qualify, you typically need to:
- Must be 55 or above. All other individuals listed on the home’s title must also meet this age requirement.
- Have a home valued at a minimum of $200,000 (although HomeEquity Bank may stipulate a minimum value of $250,000).
- Own and reside in the home you intend to borrow against as your primary residence.
Reverse mortgage application
Starting the process for a reverse mortgage typically involves filling out an estimate on the lender’s website. This will give you a rough estimate of the amount you could borrow.
When reviewing your application and deciding the maximum lending amount, lenders will pay less attention to your credit score and instead focus more on:
- Condition and location of your home
- The appraisal value of your home
- Your age.
Throughout the application process, it’s essential to include all individuals listed on the title. Additionally, lenders might request that you seek legal counsel regarding the reverse mortgage, and you may need to provide proof of receiving such advice.
Interest rates and fees for reverse mortgages in Canada
A key downside of reverse mortgages is their relatively high and ongoing interest rates throughout the loan’s duration. Since reverse mortgages lack a standard amortization schedule, interest can accumulate indefinitely, potentially consuming a significant portion of your home equity.
As of January 31, 2024, the Home Equity Bank CHIP Reverse Mortgage offered rates ranging from a fixed rate of 7.59% (7.92% APR) to a variable rate of 10.13% (10.56% APR) for five-year terms.
As of January 31, 2024, Equitable Bank’s reverse mortgages rates varied, starting from 6.74% (6.782% APR) for a five-year fixed-rate loan and going up to 8.49% (10.074% APR) for a six-month fixed-rate loan.
Both companies also charge fees for their reverse mortgages. Equitable Bank charges a $995 setup fee, separate from any legal or home appraisal expenses you might face during the application process. Home Equity Bank advertises closing and administrative costs of $1,795 for its CHIP products. However, these may vary depending on your individual situation.
Both lenders also impose charges on clients who opt to pay off their reverse mortgages ahead of schedule:
- Equitable Bank imposes up to five months’ interest as a prepayment charge if you settle your loan within the first three years. The prepayment charge decreases to three months’ interest from the fourth to the tenth year. However, you can pay off the full balance without a fee starting from the sixth year, provided you give the bank a three-month written notice. No charges apply from the eleventh year onward.
- Home Equity Bank’s prepayment rules are intricate and differ based on your chosen contract type. Generally, you can repay up to 10% of your loan yearly without penalties. After the fifth year, you can settle the loan without penalty if you give three months’ written notice.
How are reverse mortgage funds received?
Once your reverse mortgage is approved, you can tap into up to 55% of your home equity. You have two options for receiving the funds: a lump sum or a mix of an initial advance and smaller periodic payments. The right choice depends on your financial situation and needs.
If you have significant expenses like vacations or home renovations or aim to consolidate debt, choosing an initial advance followed by smaller, regular payments over the coming years is likely the sensible option.
Receiving the total loan amount at once can carry risks, especially if you qualify for the maximum amount. Spending the reverse mortgage funds quickly might leave you in a tough spot if you don’t have other avenues to access cash.
How to repay a reverse mortgage
One of the key benefits of a reverse mortgage is its flexible repayment terms. You’re not obliged to make any regular principal or interest payments. In fact, you typically won’t need to make any payments until you sell the home, move out, or the last borrower passes away, and the estate sells the property.
Keep in mind that interest will accumulate for the duration of your reverse mortgage outstanding balance. Making regular payments, even if they’re modest, can help you manage your interest expenses.
You might be required to repay your loan in full if your lender deems you in default. In the context of reverse mortgages, default can refer to various situations, such as:
- Providing false information on your loan application.
- Using the proceeds from your reverse mortgage for illicit activities.
- Neglecting to maintain your home.
- Failing to adhere to the terms specified in your agreement.
Can you owe more than the value of your home?
Equitable Bank and Home Equity Bank have “no negative equity” policies, ensuring that borrowers will never owe more than the value of their homes as long as they comply with their mortgage agreements. In the case of Home Equity Bank, they even offer to cover the shortfall if your home’s value decreases below your reverse mortgage balance.
Given the competitiveness of Canada’s housing market, a significant and long-term decrease in your home’s value is improbable. However, if such a situation were to occur, neither you nor your descendants would remain indebted to your reverse mortgage lender after selling your home.
Is it possible to refinance a reverse mortgage?
Initially, the idea of refinancing a reverse mortgage may seem unnecessary. After all, if you’re not required to make monthly payments, why bother with the process of refinancing?
However, if your home has greatly increased in value and requires additional funds, your lender might permit you to refinance and establish new mortgage terms.
Refinancing a reverse mortgage carries risks. When you refinance, you’ll be older, and age plays a role in the amount of equity you can access. If you break the terms of your reverse mortgage to refinance, you may face prepayment penalties.
Is a reverse mortgage worth it?
Opting for a reverse mortgage can significantly impact your life positively or negatively. If you’re facing a shortfall in cash and lack alternative means to cover major one-time expenses or day-to-day costs, a reverse mortgage can be a valuable solution, potentially sustaining you for years to come.
However, using up home equity now means it won’t be available later on. Consider a scenario where you need to sell your home to cover the costs of residing in an assisted living facility. Repaying a reverse mortgage could significantly reduce the proceeds from the sale, potentially limiting your options for securing long-term care.
While not all situations may be as extreme, these risks are linked with reverse mortgages. Once your equity is depleted, it’s depleted permanently.
Who should take a reverse mortgage?
Reverse mortgages are ideal for individuals who:
- They are capable of both financially and physically maintaining their properties.
- Are capable of making consistent payments towards the interest or principal.
Intend to remain in the same house indefinitely
Who should not take a reverse mortgage?
Reverse mortgages are not suitable for individuals who:
- Struggle to upkeep their home.
- Wish to pass down their home to their heirs.
- Stand to gain from selling their homes and retaining the entire equity.
Who should not take a reverse mortgage?
Reverse mortgages are not suitable for individuals who:
- Struggle to upkeep their home.
- Wish to pass down their home to their heirs.
- Stand to gain from selling their homes and retaining the entire equity.
Considerations Before Applying for a Reverse Mortgage in Canada
Don’t hesitate to ask your mortgage broker any questions you may have about reverse mortgages, regardless of how minor they may seem. It’s essential to clearly understand the implications of cashing in your equity before making a decision.
Below are some queries you’ll probably want to be addressed:
- How might obtaining a reverse mortgage impact my ability to pursue other financial avenues?
- What happens to my reverse mortgage and home after my death?
- Is accessing all my loan funds upfront or gradually over time advisable?
- What are the repercussions if I cannot afford to pay my property taxes, insurance, or house maintenance?
- Is a reverse mortgage the most suitable option for me?
Reverse mortgage alternatives
If the expenses and risks linked with a reverse mortgage don’t suit your preferences, there might be alternative methods of accessing cash. However, it’s worth noting that some of these alternatives may require compromises that you may not find comfortable.
Consider selling your home and downsizing
Selling your house provides access to all your equity without incurring any reverse mortgage fees or interest charges. Plus, if you use the sale proceeds to purchase a newer, smaller home, you’ll have cash left over and a property that’s likely to appreciate in value.
However, downsizing has limitations. You’ll lose the home you’ve grown attached to, and reentering the housing market could be a stressful and frustrating experience reminiscent of the challenges you were glad to leave behind decades ago.
Consider selling some of your other investments
If you have a strong portfolio that allows for partial liquidation, selling off some of its assets could offer the required cash.
Before proceeding, it is crucial to discuss various implications with your financial planner. This includes potential tax obligations and the effects of selling specific investments on your long-term financial security.
Consider renting out part of your property
You can capitalize on Canada’s competitive rental market by offering an additional room or basement suite for short- or long-term rent. Alongside your income, you might also find a tenant willing to assist with property maintenance.
Becoming a landlord comes with numerous risks, even if you only rent a room to travellers for a few nights each month. However, if you’re confident in your ability to screen and manage tenants and feel at ease with others occupying space in your home, renting out unused areas is a strategy worth considering.
Consider applying for a Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) offers another avenue to convert home equity into cash. However, it’s primarily viable for those with a stable income.
Before HELOC approval, lenders assess your financial situation. You may face rejection if they doubt your ability to repay HELOC withdrawals. Moreover, your lender can seize your home if approved, but you fail to repay.
Consider applying for a home equity loan
A home equity loan offers another means of accessing cash. Similar to HELOCs, approval for a home equity loan typically requires you to have ongoing income.
Home equity loans may have more straightforward qualification criteria compared to reverse mortgages. However, you’ll be placed on a strict repayment plan upon approval. Failure to comply could lead to the risk of losing your home.
Pros and cons of a reverse mortgage
Pros:
- No regular payments: While interest accrues on the loan, there’s no requirement for monthly payments.
- Extra income: Releasing equity can boost your cash flow.
- Uninterrupted income: The funds from a reverse mortgage won’t impact your Guaranteed Income Supplement (GIS) or Old-Age Security (OAS) benefits.
- Age in place: Access your home equity without selling or relocating.
- “No negative equity” assurance: You won’t owe more than the property’s value.
Cons:
- Reduced equity: Borrowing more and accruing interest will diminish your home’s equity over time.
- Higher interest rates: The interest rate you’ll pay on a home equity line of credit is usually higher than that on a traditional mortgage or HELOC.
- Prepayment penalties: Selling your home before the end of your term may incur prepayment fees.
- Initial expenses: Legal, appraisal, and administration fees may be required upfront.
Preventing reverse mortgage scams
One concerning aspect of the reverse mortgage sector is the potential for encountering scammers targeting older Canadians. You can safeguard both your home and finances by:
- Exploring reverse mortgage options on your own terms rather than at the suggestion of someone who may benefit from your application.
- Interviewing multiple licensed and experienced mortgage brokers before selecting one to work with.
- Ensuring your broker sets up your reverse mortgage through a reputable entity such as Equitable Bank or Home Equity Bank.
- Educating yourself about reverse mortgages to recognize when unnecessary personal information is requested or unnecessary fees are charged.
- Requesting all terms, conditions, and fees to be documented in writing.