Reverse mortgages
What is a reverse mortgage
A reverse mortgage is a type of loan for homeowners, usually aged 55 or older. It allows you to borrow money from your home equity without selling your home. You may do so by converting a portion of your home equity into tax-free money. Financial institutions sometimes call this “equity release.”
You may usually borrow up to 55% of the current value of your home. This money doesn’t affect the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting.
The maximum amount you may borrow depends on:
- your age and the age of other individuals registered on the title of your home
- your home’s condition, type and appraised value
- your lender
To be eligible, the home you’re using to secure a reverse mortgage must usually be your primary residence. This typically means you live in the home for at least 6 months a year.
Costs of a reverse mortgage
The interest rate for a reverse mortgage is usually higher than the interest rate for a:
- mortgage
- home equity line of credit (HELOC)
Your lender adds your interest costs to your reverse mortgage. This means that the total amount you owe increases over time.
Other costs associated with a reverse mortgage may include:
- home appraisal fees
- set-up fees
- prepayment penalties if you pay off your reverse mortgage before it’s due
- legal fees
- closing costs
These costs may vary depending on your lender.
Your lender may add the fees to the balance of your reverse mortgage. You may have to pay for other fees up front. Ask your lender about the fees that apply to your reverse mortgage.
How you get your money from a reverse mortgage also impacts your costs.
You may get your money from a reverse mortgage as:
- a lump-sum for the entire amount
- a lump-sum for part of the reverse mortgage and the rest over time
- regular payments
Ask your lender how you may get your money from a reverse mortgage.
Lump-sum for the entire amount
With a lump-sum, you get the entire amount of the reverse mortgage. This means you pay interest on the full amount. If you don’t use the full amount right away, it may be an expensive way to borrow money.
Lump-sum for part of the reverse mortgage and the rest over time
Your lender may allow you to take part of the reverse mortgage up front and the rest over time. If that’s the case, your lender may require that you take out a minimum amount up front. This amount is typically around $25,000.
Each time you take out an additional amount, your lender may:
- charge a fee
- change the interest rate on the entire amount of your reverse mortgage
These costs may significantly increase the total cost of your reverse mortgage.
Regular payments
With regular payments, you get money from your reverse mortgage regularly. You typically get $1,000 each month or $3,000 every 3 months. With this option, your lender may require that you take out an initial amount. This amount is typically around $20,000.
What to consider before getting a reverse mortgage
Make sure you understand the costs and the impact a reverse mortgage may have on you and your estate. Shop around and explore different options.
Other options
Before you get a reverse mortgage, compare other options.
These may include:
- selling your home and:
- buying a smaller home
- renting another home or an apartment
- moving into assisted living, or other type of housing
- getting another type of loan, such as:
- a line of credit, like a home equity line of credit (HELOC)
- a mortgage
- a personal loan
Your financial institution may offer other products that may be better suited for your financial needs.
Learn about choosing financial products and services that are right for you.
Professional advice
You may wish to speak with a financial advisor and with your family before getting a reverse mortgage.
This may help you better understand:
- the costs
- how it may impact your home equity
- the impact on your estate
In some provinces and territories, your lender may require that you get independent legal advice. If that’s not the case in your province or territory, you may still wish to get legal advice. This may help you make an informed decision.
Other considerations
A reverse mortgage may limit other financing options secured by your home. You may not be able to take out a HELOC or similar products at the same time.
You may also need to pay off and close any loans or lines of credit secured by your home. These may include your current mortgage and HELOC. Your lender may allow you to use the money from your reverse mortgage to pay these off.
Getting a reverse mortgage
Many financial institutions offer reverse mortgages in Canada.
You may be able to get a reverse mortgage from:
- federally regulated financial institutions, including:
- HomeEquity Bank
- Equitable bank
- provincially regulated financial institutions
- mortgage brokers
There are different levels of consumer protections in place for financial institutions offering financial products and services. This depends on who regulates them. For example, some financial institutions are federally regulated and others are provincially or territorially regulated.
When dealing with a federally regulated financial institution, such as a bank, you benefit from protections. Some of these protections are part of Canada’s Financial Consumer Protection Framework. You may not have the same protections when dealing with a provincially regulated financial institution.
Learn more about protections for bank customers.
You may use the money from your reverse mortgage for anything you wish, such as to:
- pay for home repairs or improvements
- pay regular bills
- cover healthcare expenses
- repay debts
Ask your lender if there are any restrictions or fees.
Paying back your reverse mortgage
You don't need to make any regular payments on a reverse mortgage. Your lender usually allows you to make payments up to a maximum amount. You usually also have the option to repay the principal and interest in full at any time.
If you pay off your reverse mortgage early, you may need to pay a fee. The term for repayment depends on the agreement you have with your lender. Ask your lender about the fees you need to pay if you pay your reverse mortgage early.
You need to repay the balance when:
- you sell your home
- you move out of your home
- the last borrower dies
- you default on the reverse mortgage
You and your estate usually have a limited time to pay back your reverse mortgage. Lenders establish their own policies about the timing for paying back the reverse mortgage. They also determine the consequences if you or your estate doesn’t pay it back on time.
Make sure you ask your lender for information about the timing for paying back a reverse mortgage.
Learn more about paying back your debt.
Defaulting on your reverse mortgage
If you default on your reverse mortgage, you could face serious consequences. This may include the foreclosure of your home.
You may default on a reverse mortgage by:
- using the money from the reverse mortgage for anything illegal
- being dishonest in your reverse mortgage application
- letting your home fall into a state of disrepair that would lower its value
- not following any conditions in your reverse mortgage contract
Each reverse mortgage lender may have their own criteria for defaulting on a reverse mortgage.
Ask your lender what could cause you to default.
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 need to make any regular payments
- you may turn some of the value of your home into cash, without having to sell it
- you still own your home
- you may have options as to when and how you receive the money
- you don’t pay tax on the money you borrow
- this money doesn’t affect the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting
Cons
- interest rates are higher than most other types of financial products like:
- a mortgage
- a HELOC
- the equity you hold in your home may go down as you accumulate interest
- your estate may need to repay the reverse mortgage 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
Learn more about what to consider before borrowing money.
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