Thanks to plunging interest rates and high debt loads, demand for reverse mortgages has exploded in recent years.
That trend has continued through the first half of 2020, despite the pandemic taking a bite out of the traditional mortgage business.
With many seniors now considering a reverse mortgage for the first time, one of the most common questions is, where to get one. The first thing to know is that there are just two reverse mortgage banks in Canada: HomeEquity Bank and Equitable Bank. Both offer a variety of options with some subtle and not-so-subtle differences.
HomeEquity Bank is the incumbent in Canada’s reverse mortgage market with more than 30 years of experience. Equitable Bank is the newcomer. It first began offering reverse mortgages in early 2018.
HomeEquity Bank vs. Equitable Bank
Here’s a quick side-by-side comparison of some key differences between the two:
|HomeEquity Bank||Equitable Bank|
|Reverse Mortgage Loan Size||
(Key for those with more expensive homes)
Officially capped at $800k
(Equitable makes exceptions “on a case-by-case basis,” noting they’ve previously funded $1 million+ deals)
|Min. Home Value||$150,000||$250,000|
|Stipulations||Minimum $25,000 loan amount||Lowest rates require borrowers to take the full loan amount upfront. (Attracting higher interest costs for borrowers who don’t need all their money at once.) Equitable offers additional flexibility to borrow over time, but at a higher interest rate.|
|Geographic Offering||Nationally||AB, BC, ON, QC only|
|Main Product||CHIP Reverse Mortgage. Current 5-year fixed rate: 4.99%||Equitable Reverse Mortgage. Current 5-year fixed rate: 4.69%|
CHIP Max Reverse Mortgage (Offers up to 30% greater loan amounts)
Current 5-year fixed rate: 6.29%
Lump-Sum Reverse Mortgage
(For people who are willing to take all their money at once)
Current 5-year fixed rate: 3.99%
A prepayment on or before the third anniversary date of your mortgage entails a charge equal to the mortgage balance times:
- 5% in year one
- 4% in year two
- 3% in year three
After the third anniversary, the charge is three months’ interest.
After the fifth anniversary there is no charge if written notice is provided at least three months in advance. Otherwise, three months’ interest. Exceptions may apply.
A prepayment charge applies as follows, depending on when the reverse mortgage is terminated:
- 5 months’ interest in year one
- 4 months’ interest in year two
- 3 months’ interest in year three to five
After the fifth anniversary, there is no charge if written notice is provided at least three months in advance. Otherwise, three months’ interest.
After the 10th anniversary, there is no charge.
|Setup Fees *||$1,795, which is deducted from the mortgage proceeds. Includes closing service.||$995, which is deducted from the mortgage proceeds. Closing service is up to $600 additional.|
* Note: Neither company's "setup" fee includes the appraisal (which costs up to $500) or independent legal advice (roughly $550).
Apart from borrowers’ need for cash, falling costs are a major factor now driving reverse mortgage adoption. For example, the lowest rate for a standard 5-year fixed reverse mortgage is now just 3.99% for the first time ever. That’s all the way down from 5.74% a year ago.
Just be careful not to get too hung up on rates. If you choose Equitable’s 3.99% Lump-sum reverse mortgage because of its lower rate, but you don’t need all the money at once, you’re paying interest needlessly. You may very well pay more with that lower rate than you would at HomeEquity Bank’s higher rate.
A simple example illustrates this: Suppose you're a customer who qualifies for $100,000 and takes the full amount on closing day. But say you only needed $70,000 of that money for the next three years. The excess interest would be $1,675 after three years on the Equitable Mortgage. (Assumes a 3-year Equitable fixed term at 3.99% vs. a 3-year HomeEquity rate of 4.89%.)".
To sum it all up, each company has its own niches. Essentially you want to pick the loan that gives you what you need at the lowest total cost, all things considered.
Rates.ca Tip: For well-qualified borrowers who don’t need a big chunk of cash at once, and who don’t mind making interest payments, a Home Equity Line of Credit is sometimes a cheaper suitable alternative, as we explored previously in this piece.