Although it may seem like a complicated or contradictory concept, the features that make up a reverse mortgage are rather simple. A reverse mortgage is a home equity product that allows homeowners aged 55 years and older to access up to 55% of the value in their homes.
Homeowners can choose to receive the money from the reverse mortgage via one lump-sum payment, planned advances, or a combination of both options. If there is an existing loan on the property, such as a home equity line of credit (HELOC), that debt must first be paid off. This can be done using the reverse mortgage funds.
One of the core benefits of a reverse mortgage is that the homeowner is not required to make any payments once they have received the funds. And, while it’s always prudent to pay down loans, reverse mortgages focus on providing a solution to those with limited cash flow, allowing seniors to supplement their incomes.
Interest is added to the original loan amount and charged until the loan is paid off in full. The homeowner has the option to pay off the principal and interest in full at any time, although a prepayment charge may apply.
Reverse mortgage holders may be able to repay a portion of the principal and interest without incurring a prepayment charge. For instance, if the reverse mortgage allows, the reverse mortgage holder can pay up to 10% of the principal amount once annually.
If the homeowner (or last borrower) dies before repaying the full amount of their loan and interest, their estate is obliged to repay the remaining loan amount.
Why would someone get a reverse mortgage?
A reverse mortgage is a product that enables Canadians aged 55 and up to turn the value of their home into cash without having to sell it. The funds received via a reverse mortgage are tax-free, and the income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits they may be getting from the government.
Older Canadians can use reverse mortgages if they are short on cash but are reluctant to downsize and move out of the family home. It means the homeowner can stay where they are without taking on a second mortgage or a potentially expensive line of credit.
Reverse mortgage funds can be used for anything, such as:
- Home improvements
- Retirement income
- Healthcare costs
- A down payment for the homeowner’s children or grandchildren
Before seeking a reverse mortgage, Canadian law requires borrowers to seek independent legal advice to ensure they are making a decision in their best interest.
The homeowner should anticipate legal fees, appraisal, and administration fees, dependent on the reverse mortgage terms. In many cases, the legal and administration fees are financed as part of the reverse mortgage. Usually, the only out-of-pocket expense is the appraisal, which generally costs anywhere from $300 to $400.
What else do homeowners need to know about reverse mortgages?
Reverse mortgages tend to have higher interest rates than traditional mortgages, and homeowners could be liable for a prepayment penalty if they sell their house or move out within three years of getting one.
Here are some questions to consider:
- Would another product, such as a line of credit, be a better option?
- Should you sell your current home and downsize?
- Would moving into assisted living or other alternative housing be a sensible alternative?
As with most financial decisions, homeowners should shop around for a reverse mortgage and talk to a trusted advisor or mortgage broker.
Where can someone get a reverse mortgage?
Three financial institutions offer reverse mortgages in Canada.
- HomeEquity Bank is the leading provider of reverse mortgages in Canada. Its product, the Canadian Home Income Plan (CHIP), is available across Canada, either directly from the bank or through a mortgage broker.
- Equitable Bank offers a reverse mortgage product available through mortgage brokers in Alberta, British Columbia, Ontario, and Quebec.
- Bloom Finance Company is a newer reverse mortgage lender to enter the market and is currently available in Ontario with plans to expand to other provinces.
Compare Canada’s best reverse mortgage rates at RATESDOTCA.