Although it may seem like a complicated or paradoxical 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, the debt must first be paid out from 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. It would be prudent, however, to make payments if they don’t want to accumulate interest. Interest is added to the original loan amount and charged until the loan is paid off in full, but the homeowner does have the option to pay off the principal and interest in full at any time. If the homeowner dies before repaying the full amount of their loan and interest, their estate is obliged to repay the remaining amount in full.
Why would someone get a reverse mortgage?
A reverse mortgage is a product that enables Canadians over the age of 55 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.
Reverse mortgages can be utilized by older Canadians who 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 having to take on a second mortgage or a potentially expensive line of credit. The money received from a reverse mortgage can be used for anything, such as:
- Home improvements.
- Retirement income.
- Healthcare costs.
- A down payment for the home owner’s children or grandchildren.
To ensure homeowners are making a decision that’s in their best interest, borrowers in Canada are required by law to seek independent legal advice before being approved for a reverse mortgage. The homeowner is also required to pay legal fees, an appraisal fee and administration fees, which are dependent on the terms of the reverse mortgage. In many cases, the legal and administration fees are financed as part of the reverse mortgage itself and the only out-of-pocket expense is the appraisal, which generally costs between $175 and $400.
What else do homeowners need to know about reverse mortgages?
Reverse mortgages tend to have higher interest rates than traditional mortgages and homeowners may be liable for a prepayment penalty if they sell their house or move out within three years of getting a reverse mortgage.
As with most financial decisions, homeowners are advised to shop around, talk to family members, friends or a trusted advisor and consider all of their options. Some questions to consider: Would another type of loans, such as a line of credit or credit card be a better option for you? Should you just sell your current home and downsize? Or, would moving into assisted living or other alternative housing be a sensible alternative?
Where can someone get a reverse mortgage?
There are now two financial institutions that offer reverse mortgages in Canada. Toronto-based HomEquity Bank, a federally regulated, Schedule 1 Canadian bank is the leading provider of reverse mortgages in Canada for over 30 years. Their product, the CHIP Reverse Mortgage is available across Canada either directly from the bank or through a mortgage broker. As of January 2018, Equitable Bank started to offer a reverse mortgage product called the PATH Home Plan, which is only available through mortgage brokers in Alberta, British Columbia and Ontario.