Reverse Mortgages

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When should you consider a Reverse Mortgage?
  • Retiring with debt and looking to consolidate and avoid payments

  • Want to travel more

  • Need monthly cash flow for bills and expenses

  • Investment portfolio has not performed as well as planned

  • Need money to pay for home care or long-term care

  • Looking to help children or grandchildren to purchase a home

  • Purchasing a new home

  • Purchasing an investment or vacation property

  • Don't want to move or downsize

  • Need to create retirement income

  • Unexpected home repairs

Key Benefits of a Reverse Mortgage

  1. You receive the money tax-free. It is not added to your taxable income so it doesn’t affect Old Age Security (OAS) or Guaranteed Income Supplement (GIS) government benefits you may receive.

  2. Free yourself from monthly mortgage payments until you choose to move or sell.

  3. Stay in your home.

  4. You maintain full ownership and control of the property.

  5. You have the ability of borrowing up to 55% of the value of your home.

  6. Receive your money TAX-FREE.

  7. Flexible withdrawal options.

  8. Optional to make interest payments.

From the Financial Consumer Agency of Canada

A reverse mortgage is a loan that allows you to get money from your home equity without having to sell your home. This is sometimes called “equity release”. You may be able to borrow up to a certain percentage of the current value of your home. The maximum amount you will be able to borrow will depend on your age, your home’s appraised value and your lender.

You don’t need to make any payments on a reverse mortgage until the loan is due. This is usually when you move out of your home, sell it or the last borrower dies. You will owe more interest on a reverse mortgage the longer you go without making payments. This may result in you having less equity in your home.

Eligibility for a reverse mortgage

To be eligible for a reverse mortgage, you must be:

  • a homeowner

  • at least 55 years old
     

If you have a spouse and you are both on the title for your house, both of you must be listed on the reverse mortgage application. Both of you must be at least 55 years old to be eligible for a reverse mortgage.

The home you’re using to secure a reverse mortgage must also be your primary residence. This usually means you live in the home for at least six months a year.

 

If you have a mortgage on your house you must pay it off when you get a reverse mortgage. You can use the money you get from a reverse mortgage to pay any mortgage, debt or lien against your house.
 

Qualifying for a reverse mortgage

When you apply for a reverse mortgage, your lender will consider:

  • your age, and the age of your spouse if they are registered on the title of your house

  • where you live

  • your home’s condition, type and appraised value
     

In general, the older you are and the more home equity you have when you apply for a reverse mortgage, the more money you could get. Current market trends will also impact how much money you could get. Your lender may ask you and your spouse to show proof that you received independent legal advice before you get a reverse mortgage.
 

Accessing money with a reverse mortgage

You may be able to get the money from your loan by:

  • taking the money as a one-time lump sum

  • taking some of the money up front and taking the rest over time

 

Ask your lender what payment options they offer for a reverse mortgage and whether there are any restrictions or fees.

You must first pay off and close any outstanding loans or lines of credit that are secured by your home, such as a mortgage or home equity line of credit. You could use the money you get from a reverse mortgage to do this.

 

You can use the remainder of the loan for anything you wish, such as to:

  • pay for home repairs or improvements

  • help with regular bills

  • cover healthcare expenses

  • repay debts

 

You may not be able to take out another loan secured by your home, such as a home equity line of credit, if you have a reverse mortgage.

 

Repaying the money you borrow with a reverse mortgage

You don't need to make any regular payments on a reverse mortgage. You have the option to repay the principal and interest in full at any time. However, you may be charged a fee to pay off your reverse mortgage early.

 

Interest will be charged until the loan is paid off in full. The interest will be added to the original loan amount, which increases the loan amount over time.

 

If you sell your house or if you move out you'll have to repay the entire amount left owing on the loan. You will also have to repay the entire amount owing if you default on the loan.

 

You could default on a reverse mortgage by:

  • using the money from the reverse mortgage for anything that is illegal

  • being dishonest in your reverse mortgage application

  • letting your house fall into a state of disrepair that would lower how much it is worth

  • not following any conditions that you agreed to when getting your reverse mortgage

 

Each reverse mortgage lender may have its own definition of defaulting on a reverse mortgage. Ask your lender what could cause you to default.

When you die your estate will have to repay the entire amount owing on the loan. If both you and your spouse own your home together, then the loan will have to be repaid when the last one of you dies or sells your home.

The amount of time that you or your estate will have to repay a reverse mortgage may vary. For example, if you die then your estate may have 180 days to pay back the mortgage. But if you move into long-term care, then you might have one year to pay it back. Make sure you ask your lender for information about the timing for paying back a reverse mortgage.

 

Costs to get a reverse mortgage

Costs associated with a reverse mortgage may include:

  • higher interest rate than for a traditional mortgage

  • a home appraisal fee

  • a setup fee

  • a prepayment penalty if you pay off your reverse mortgage before it is due

  • legal fees for closing costs or independent legal advice

 

The costs will vary depending on your lender. Different lenders may also use different terms to refer to similar fees. Some fees may be added to the balance of your loan, while you may have to pay for others up front.

 

Shop around and explore your options before getting a reverse mortgage.

Compare the costs of the following potential alternatives to a reverse mortgage:

  • getting another type of loan, such as a personal loan, line of credit or credit card

  • selling your home

  • buying a smaller home

  • renting another home or apartment

  • moving into assisted living, or other alternative housing

 

You may want to speak with a financial advisor and your family before getting a reverse mortgage. Make sure you understand how a reverse mortgage works and how your home equity may be affected over time.

 

Make sure you understand the terms and conditions of the contract before you sign it.

 

Where to get a reverse mortgage

Two financial institutions offer reverse mortgages in Canada:

  • HomEquity Bank offers the Canadian Home Income Plan (CHIP), which is available across Canada directly from HomEquity Bank or through mortgage brokers

  • Equitable Bank offers the PATH Home Plan, which is available through mortgage brokers in Alberta, British Columbia and Ontario

 

Your financial institution may offer other products that might meet your needs.

 

Pros and cons of a reverse mortgage

Before you decide to get a reverse mortgage, make sure you consider the pros and cons carefully.

 

Pros

  • You don't have to make any regular loan payments

  • You may turn some of the value of your home into cash, without having to sell it

  • You don’t have to pay tax on the money you borrow

  • This money does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting

  • You still own your home

  • You may have options as to when and how you receive the money
     

Cons

  • Interest rates are higher than most other types of mortgages

  • The equity you hold in your home may go down as the interest on your loan adds up throughout the years

  • Your estate will have to repay the loan and interest in full within a set period of time when you die

  • The time needed to settle an estate may be longer than the time allowed to repay a reverse mortgage

  • There may be less money in your estate to leave to your children or other beneficiaries

  • Costs associated with a reverse mortgage may be higher than a regular mortgage or other lending products

 

Questions to ask a lender about reverse mortgages

Before getting a reverse mortgage, ask your lender about:

  • the fees

  • how you can get the money from a reverse mortgage and if there are any fees you will have to pay

  • what interest rate you will have to pay on the money you borrow

  • any penalties if you sell your home within a certain period of time

  • how much time you or your estate will have to pay off the loan’s balance if you move or die

  • what happens if it takes your estate longer than the stated time period to fully repay the loan when you die

  • what happens if the amount of the loan ends up being higher than your home’s value when it's time to pay the loan back