Reverse mortgages

From 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. You may be able to borrow up to 55% of the current value of your home tax-free.

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, both of you must be at least 55 years old to be eligible.

Qualifying for a reverse mortgage

To get a reverse mortgage, your lender will consider:

  • your home equity
  • where you live
  • your age
  • your home’s appraised value
  • current interest rates

In general, the older you are and the more home equity you have when you apply for a reverse mortgage, the bigger your loan will be.

Accessing money with a reverse mortgage

You may choose to get the money from your loan through:

  • lump-sum payment
  • planned advances, giving you a regular income
  • a combination of both of these options

You must first pay off any outstanding loans that are secured by the equity in your home with the funds you get from your reverse mortgage.

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

  • pay for home improvements
  • add to your retirement income
  • cover healthcare expenses

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.

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 make payments. When you die, your estate will have to repay the loan.

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 closing fee
  • a prepayment penalty if you sell your house or move out within 3 years of getting a reverse mortgage
  • fees for independent legal advice

Shop around and explore your options before getting a reverse mortgage. Compare the costs and impact of the following:

  • getting another type of loan, such as a line of credit or credit card, etc
  • selling your home
  • buying a smaller home
  • renting another home or apartment
  • moving into assisted living, or other alternative housing

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

Where to get a reverse mortgage

The Canadian Home Income Plan (CHIP), offered by HomEquity Bank, is the only source of reverse mortgage products in Canada. However, your financial institution may also offer similar products that may 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
  • The money you borrow is a tax-free source of income
  • This income does not affect the Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits you may be getting
  • You still own your home
  • You can decide how to get the funds

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 can often 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 are usually quite high compared to a regular mortgage

Questions to ask a lender about reverse mortgages

Before getting a reverse mortgage, ask your lender about:

  • the fees
  • any penalties if you sell your home within a certain period of time
  • how much time will you or your estate 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 is time to pay the loan back

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