Reverse mortgages

From: Financial Consumer Agency of Canada

What is a reverse mortgage

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 can borrow up to 55% of the current value of your home.

The maximum amount you’re able to borrow will depends on:

  • your age
  • your home’s appraised value
  • your lender

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

Who is eligible for a reverse mortgage

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

  • a homeowner
  • at least 55 years old

On your reverse mortgage application, you must include all the individuals listed on your home’s title. All these individuals must be at least 55 years old to be eligible.

Your lender may also ask you and the other individuals to get independent legal advice. They may ask for proof that you received this advice.

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

  • your age, and the age of other individuals registered on the title of your home
  • where you live
  • your home’s condition, type and appraised value

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.

How a reverse mortgage works

Before getting a reverse mortgage, you must first pay off and close any outstanding loans or lines of credit that are secured by your home. These can include a mortgage and a home equity line of credit (HELOC). You can 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

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.

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. Also ask whether there are any restrictions or fees.

How to repay the money you borrow

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 have to pay a fee to pay off your reverse mortgage early.

You have to repay the amount left owing when:

  • you sell your home
  • you move out of your home
  • the last borrower dies
  • 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 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 definition of defaulting on a reverse mortgage. Ask your lender what could cause you to default.

When you die, your estate has to repay the entire amount owing. If multiple individuals own the home, the loan has to be repaid when the last one dies or sells your home.

The amount of time that you or your estate has to repay a reverse mortgage may vary. For example, if you die then your estate may have 180 days to pay back the mortgage. However,  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.

How much a reverse mortgage can cost

Costs associated with a reverse mortgage may include:

  • 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 for others up front.

Find out more about what you should know before you sign a contract.

Where to get a reverse mortgage

Two financial institutions offer reverse mortgages in Canada. HomeEquity Bank offers the Canadian Home Income Plan (CHIP), which is available across Canada. You can get a reverse mortgage directly from HomeEquity Bank or through mortgage brokers. Equitable Bank offers a reverse mortgage in some major urban centres.

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 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 it can affect your home equity over time.

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 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
  • 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

What 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
  • if there are any fees you have to pay
  • what interest rate you have to pay on the money you borrow
  • what can cause you to default on the loan
  • any penalties you have to pay if you sell your home within a certain period of time
  • 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
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