High 

Reverse mortgages are becoming increasingly popular in the 55+ age group. Canada and the US are the only countries who offer Reverse Mortgages. A Reverse Mortgage can be a great fit in this age group for those who are cash poor, but house rich and prefer to stay in their home.

What is a Reverse Mortgage?

A Reverse Mortgage is a loan secured against the value of your home. It enables you to convert up to 55% of your home’s value into tax-free cash. The funds can be used for whatever you desire: to cover monthly expenses, renovate your home, pay for in-home care or medical expenses, pay off debt or travel – the choice is yours! With a Reverse Mortgage, you maintain ownership of your home and there are no monthly mortgage payments required. You may be able get the money from your loan as one-time lump sum or take some of the money up front and the rest over time. Repayment of the loan is only required once you choose to move or sell.

Reverse Mortgage Qualification

• You must be a Canadian Homeowner
• All persons on title to the home just be 55 or over
• The Reverse Mortgage is for your principal residence
• There are no existing mortgages or loans secured against the property
• Reverse Mortgages are not issued for more than 55% of the home value
• You can qualify for up to 55% depending on the property location, property type and the home valuation. The value can vary, depending on these factors
• The amount of money you owe can never be more than the home is worth. This is a safeguard of the Reverse Mortgage in Canada.

Home Equity Example (figures for example purpose only):

• The home is valued at $500,000
• The Reverse Mortgage is for 50% at $250,000
• The interest rate is 5%
• Annual interest rate on $250,000 mortgage at 5% = $12,500
• Annual growth in equity on home at 2.5% = $12,500
• The home equity only needs to grow at half the rate of the reverse mortgage to maintain the equity position in this example. This rule applies for all reverse mortgage amounts.

Who Provides Reverse Mortgages:

Two financial institutions offer Reverse Mortgages in Canada.

• Home Equity Bank offers the CHIP Reverse Mortgage (Canadian Home Income Plan) which is available across Canada directly from Home Equity bank or through mortgage brokers.
• Equitable Bank offers Reverse Mortgages in some major urban centres.

Costs Associated with a Reverse Mortgage:

• A 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. Some fees may be added to the balance of your loan. You may have to pay up front for others.

Shop around and explore your options before you get a Reverse Mortgage:

Your financial institution may offer other products that might meet your needs. Compare the costs of the following potential alternative to a Reverse Mortgage

• Getting another type of loan, such as a personal loan, line of credit or credit card
• Selling your home
• Downsizing to a smaller home
• Renting another home or apartment
• Moving into assisted living or other alternative housing

Pros and Cons of a Reverse Mortgage:

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 do not 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 you accumulate interest on your loan
• Your estate has to repay the loan and interest 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 credit products

Questions to ask a Lender about Reverse Mortgages

Before getting a Reverse Mortgage, ask your lender about:

• How you can get the money from a reverse mortgage?
• Are any fees you have to pay upfront or later on?
• Are there any restrictions?
• What interest rate you have to pay on the money you borrow?
• What can cause you to default on the loan?
• Are there penalties to pay if you sell your home within a certain time period?
• How much time you have to pay off the loan’s balance if you move?
• How much time your estate has to pay off the loan’s balance if you die?
• What happens if it takes your estate longer than the stated 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?

Before you decide to get a reverse mortgage, make sure you consider the pros and cons carefully. Seeking advice from a financial advisor, your estate lawyer and/or your family would be recommended. Make sure you understand how a Reverse Mortgage works and how it can affect your home equity over time.