How Does a Reverse Mortgage Work in Canada: A Comprehensive Guide

Reverse mortgages have become an increasingly popular option for Canadian homeowners who are looking to access their home equity without having to sell their homes. This financial product allows homeowners aged 55 and older to borrow up to 55% of the current value of their homes, tax-free. The borrowed amount, plus interest, is repaid when the homeowner sells the property, moves out, or passes away.

Reverse mortgages work differently than traditional mortgages. With a traditional mortgage, the homeowner makes monthly mortgage payments to the lender until the loan is paid off. With a reverse mortgage, the lender makes payments to the homeowner, either as a lump sum, a regular monthly deposit, or a combination of both. The interest on the loan accumulates over time, and the total amount owed increases as a result.

Before taking out a reverse mortgage loan, it’s important for homeowners to understand the obligations and associated fees that come with this financial product. Appraisal fees, independent legal advice, and closing and administrative costs are just a few of the fees that homeowners may incur. Homeowners should also be aware that the amount they are able to borrow will depend on their age, their home’s appraised value, and their lender.

Highlights

• Reverse mortgages allow Canadian homeowners aged 55+ to borrow up to 55% of their home’s value tax-free, repayable upon selling the home or the owner’s death, without monthly payments.
• Homeowners considering reverse mortgages should be aware of additional costs such as appraisal and legal fees. The loan amount varies based on the homeowner’s age and home value.
• Alternatives to reverse mortgages include selling the home, using a HELOC, a sale-leaseback with children, or refinancing the mortgage, each offering different benefits for accessing home equity.

What is a Reverse Mortgage?

A reverse mortgage is a type of loan that allows Canadian homeowners aged 55 years and older to access a portion of their home’s equity in the form of tax free cash. Unlike traditional mortgages, borrowers do not have to make regular payments on a reverse mortgage. Instead, the loan is repaid when the borrower sells their home, moves out, or passes away.

The amount of money that can be borrowed through a reverse mortgage is based on the fair market value of the home, the borrower’s age, and the location of the home. Generally, the older the borrower and the more valuable the home, the more money that can be borrowed.

Taking out a reverse mortgage can impact the borrower’s ability to leave an inheritance for their heirs. The loan balance will need to be repaid upon the borrower’s passing, which may require the sale of the home. However, if the home sells for more than the loan balance, the borrower’s estate will receive the excess funds.

Qualifying For A Reverse Mortgage

Reverse mortgages are designed exclusively for Canadian homeowners aged 55 years and older. To be eligible for a reverse mortgage, the following requirements must be met:

• The homeowner must be at least 55 years old.
• The home must be the primary residence of the homeowner.
• The home must have a minimum appraised value, which varies depending on the location of the property.
• All individuals listed on the home’s title must be at least 55 years old.
• The homeowner must have settled any outstanding loans or lines of credit secured by the house.

It is important to note that the amount of money a homeowner can borrow through a reverse mortgage is based on the age of the youngest borrower, if there are two or more borrowers on the home, and the appraised value of the home. Potentially, the older the borrower, the more money they can borrow. Additionally, the amount of money a homeowner can borrow is limited to a percentage of the home’s appraised value.

Before applying for a reverse mortgage, homeowners must also undergo a financial assessment to determine their ability to make property tax and insurance payments. If the homeowner is deemed unable to make these payments, a portion of the loan may be set aside to cover these costs.

Who Should Use A Reverse Mortgage Loan

Reverse mortgages can be beneficial for certain individuals who meet specific criteria and have particular financial needs. Here are some situations where a reverse mortgage may be considered:

1. Supplementing Retirement Income: Retirees who have limited savings or pension income may find it helpful in supplementing their retirement income with tax free cash. It can provide a regular cash flow that can be used to cover living expenses, healthcare costs, or other financial needs.
2. Age in Place: Elderly individuals who wish to remain in their homes, commonly referred to as “aging in place,” may find a reverse mortgage beneficial. It allows them to access the equity in their homes without the need to sell or move out, providing financial flexibility while maintaining their independence.
3. Paying for Healthcare Expenses: Rising healthcare costs can pose a significant financial burden for seniors. A reverse mortgage can help cover medical bills, long-term care expenses, or home modifications to enhance accessibility and accommodate aging in place.
4. Clearing Existing Debts: If an elderly person has outstanding debts, such as high-interest credit card debt or mortgage payments, a reverse mortgage can be used to pay off those debts, reducing financial strain and improving cash flow.
5. Delaying Government Benefits: By using a reverse mortgage to supplement income, some individuals may choose to delay receiving government benefits, such as Canada Pension Plan (CPP) or Old Age Security (OAS). Delaying benefits can increase their monthly payout when they do start receiving them.

It’s important to note that the decision to pursue a reverse mortgage should be carefully considered and discussed with a financial advisor or mortgage professional. They can provide personalized guidance based on the individual’s financial situation, goals, and other relevant factors.

How a Reverse Mortgage Works

A reverse mortgage is an exciting financial product that empowers Canadian homeowners aged 55 or older to unlock the value of their home and turn it into cash. With this unique mortgage option, you won’t have to worry about those monthly payments that traditional mortgages demand. Instead, the lender will make payments directly to you. Whether you prefer to receive a lump sum or a series of regular payments, the choice is yours.

Here’s what you need to know about the value of your home in relation to a reverse mortgage:

• Your home’s value plays a critical role in determining how much money you can borrow. It directly influences the amount of equity you can access through a reverse mortgage.
• When calculating the loan amount, lenders take into account several factors such as your age, current interest rates, and the appraised value of your property. The older you are and the more valuable your home, the higher loan amount you may qualify for.
• Remember, your home also serves as collateral for the reverse mortgage loan. In the event that the loan becomes due—when you move out or pass away—the lender will seek repayment by selling the home. However, any remaining equity after repayment will go to you or your heirs.

It’s important to bear in mind that the value of your home is not fixed and can fluctuate over time due to factors such as market conditions and property maintenance. To ensure an accurate assessment of your home’s value and the available equity, regular property appraisals may be required throughout the life of the reverse mortgage.

Understanding the fair market value of your home is crucial for evaluating the potential borrowing capacity and overall financial implications of a reverse mortgage. To make an informed decision tailored to your specific situation, it is highly recommended that you consult with a knowledgeable mortgage professional or financial advisor.

Payment Options

There are different payment options available for a reverse mortgage. The borrower can choose to receive a lump sum payment, regular payments, or a combination of both. With a lump sum payment, the borrower receives the entire amount of the loan upfront. This option is suitable for borrowers who need a significant amount of cash at once, such as to pay off debts or cover medical expenses. With regular payments, the borrower receives a fixed amount of money each month. This option is suitable for borrowers who need a steady stream of income to cover living expenses.

Interest Rates

Reverse mortgages typically have higher interest rates than traditional mortgages because the lender is taking on more risk. The interest rate on a reverse mortgage can be fixed or variable. With a fixed interest rate, the borrower knows exactly how much interest they will pay over the life of the loan. With a variable interest rate, the interest rate can fluctuate over time based on market conditions. Borrowers should carefully consider the interest rate and the impact it will have on the amount of equity they have in their home.

Repayment

A reverse mortgage becomes due when the borrower dies, sells the home, or moves out of the home permanently. At that point, the borrower or their estate must repay the loan, including the principal and interest. If the home is sold, the proceeds from the sale are used to repay the loan. If the sale price is higher than the loan balance, the borrower or their estate keeps the difference. If the sale price is lower than the loan balance, the borrower or their estate must make up the difference. If the borrower dies and their estate wants to keep the home, they must repay the loan in full.

Factors Affecting Your Reverse Mortgage Decision

1. Interest rates: The interest rate on a reverse mortgage can be higher than on a traditional mortgage, so it is important to compare rates from multiple lenders to find the best option.
2. Fees: Reverse mortgages can come with fees, such as appraisal fees, legal fees, and closing costs. These fees can vary between lenders, so it is important to compare the fees from multiple lenders to determine the total cost of the reverse mortgage.
3. Eligibility requirements: Not all homeowners will be eligible for a reverse mortgage, and the eligibility requirements can vary between lenders. Some lenders may require the homeowner to be a certain age, have a certain level of home equity, or meet other criteria.
4. Payment options: Reverse mortgages can offer different payment options, such as lump sum payments, monthly payments, or a line of credit. It is important to consider which payment option is best for your financial situation.
5. Loan amounts: Reverse mortgages can allow homeowners to access a portion of their home equity, but the maximum loan amount can vary between lenders. It is important to consider how much equity you need to access and which lender can provide that amount.
6. Financial implications: It is important to consider the long-term financial implications of a reverse mortgage, including the impact on your estate and inheritance, and any tax implications.

Pros and Cons of a Reverse Mortgage

A reverse mortgage is a financial product that allows Canadian homeowners aged 55 or older to borrow against the equity in their homes. While it can be a useful tool for some, it’s important to understand the potential pros and cons before deciding if a reverse mortgage is right for you.

Pros

The advantages of a reverse mortgage include:

• Tax-free income: Homeowners with significant equity in their homes can benefit from a reverse mortgage by receiving a source of tax-free income. This is especially valuable for seniors who may be struggling financially in retirement.
• Extended stay in homes: A reverse mortgage can help homeowners stay in their homes for a longer duration. By accessing additional income through the reverse mortgage, seniors can make necessary repairs and modifications to their homes, facilitating aging in place.
• Flexible use of funds: Reverse mortgages offer flexibility in how the funds can be utilized. Homeowners have the option to receive the money as a lump sum, regular payments, or a line of credit, based on their specific needs and preferences.

Cons

The potential downsides of a reverse mortgage include:

• Expense: Reverse mortgages can come with various fees, such as appraisal fees, legal fees, and closing costs, making them a costly option. Additionally, the interest rates on reverse mortgages are typically higher than those on traditional mortgages.
• Reduction in equity: A reverse mortgage has the potential to decrease the amount of equity homeowners have in their homes. This may make it more challenging to leave an inheritance for loved ones or sell the home in the future.
• Loan repayment: It’s essential to remember that a reverse mortgage is a loan that must be repaid with interest. Homeowners who take out a reverse mortgage may end up owing more than the value of their home, which can be a cause for concern.

Costs Associated With A Reverse Mortgage

In Canada, there are several costs associated with a reverse mortgage, including:

1. Appraisal Fee: Before you can take out a reverse mortgage, your home will need to be appraised to determine its current value. The cost of the appraisal will vary depending on the size and location of your home, but it typically ranges from $200 to $500.
2. Legal Fees: You will need to hire a lawyer to review and sign the reverse mortgage documents. The legal fees can vary, but they generally range from $300 to $1,500.
3. Closing Costs: Similar to a traditional mortgage, there may be closing costs associated with a reverse mortgage. These costs can include administrative fees, title insurance, and registration fees. The amount of the closing costs can vary but generally ranges from $1,500 to $3,000.
4. Interest: Like all mortgages, a reverse mortgage accrues interest, which can increase over time. The interest rate for a reverse mortgage is typically higher than a traditional mortgage, and the longer you have the reverse mortgage, the more interest you will owe.

It is important to note that some of these costs may be negotiable, and you should speak with a lender or mortgage broker to discuss the specific costs associated with a reverse mortgage.

Reverse Mortgage Lenders In Canada

There are many lenders in Canada that can offer reverse mortgages. It is important to do your research to determine which bank offers the best conditions, interest rates and repayment schedule.

HomeEquity Bank

HomeEquity Bank is the leading provider of reverse mortgages in Canada and offers the CHIP Reverse Mortgage (Canadian Home Income Plan). They have been in business for over 30 years and have helped thousands of Canadians access the equity in their homes. CHIP Reverse Mortgage is a division of HomeEquity Bank and is focused exclusively on providing reverse mortgages to Canadian homeowners. Homeowners can receive up to 55% of the value of their home in tax free cash, which can be received as a lump sum, regular payments, or a combination of both. They have flexible payment plans.

Equitable Bank

Equitable Bank is a Canadian bank that offers a range of financial products, including reverse mortgages. Their PATH Home Plan is a reverse mortgage that allows homeowners to access the equity in their homes without having to make any monthly payments.

Royal Bank of Canada (RBC)

RBC is one of the largest banks in Canada and offers a reverse mortgage called the RBC Homeline Plan. Their reverse mortgage allows homeowners to access the equity in their home without having to make any monthly payments.

Bank of Montreal (BMO)

BMO offers the BMO Smart Reverse Mortgage, which allows homeowners to access up to 55% of the value of their home. This reverse mortgage also offers flexible payment options.

TD Canada Trust

TD Canada Trust offers the TD Reverse Mortgage, which allows homeowners to access the equity in their homes without having to make any monthly payments. They also offer flexible payment options.

Scotiabank

Scotiabank does not offer a traditional reverse mortgage product but offers the Scotia Total Equity Plan (STEP), which allows homeowners to access up to 80% of the value of their home. Scotiabank’s STEP program acts more like a HELOC and has flexible payment options.

CIBC

CIBC does not offer a traditional reverse mortgage product, but they do offer a home equity line of credit (HELOC) that can be used to access the equity in your home. This is not a reverse mortgage, but it can be a useful alternative for some homeowners.

Alternatives to a Reverse Mortgage

While a reverse mortgage can be a useful tool for some seniors, it may not be the best option for everyone. Fortunately, there are alternative ways to access the equity in your home:

• Sell your home: Selling your home and downsizing to a smaller property is one way to access the equity in your home. This option may be suitable for seniors who no longer need a large home or who want to move closer to family members.
• HELOC: A home equity line of credit (HELOC) is another option for seniors who want to access the equity in their home. A HELOC is a revolving line of credit that allows you to borrow against the equity in your home. Unlike a reverse mortgage, a HELOC requires you to make monthly payments on the amount you borrow.
• Sell your home to your children: Another alternative to a reverse mortgage is to sell your home to your children. One approach is a sale-leaseback agreement, in which you sell the house and then rent it back from your children. This option can be a good way to transfer wealth to your children while still maintaining control of your home.
• Refinance your mortgage: Refinancing your mortgage can be a good way to access the equity in your home. If you have a low interest rate on your current mortgage, you may be able to refinance at a higher rate and receive cash back. However, this option may not be suitable for seniors who have a limited income.

It’s important to consider all of your options before deciding which one is right for you. A financial advisor can help you evaluate your choices and make an informed decision.

Difference between A Reverse Mortgage vs. Home Equity Line Of Credit

HELOCs and reverse mortgages in Canada:

Note that these are general differences and may vary between specific lenders and products. It is important to do your research and speak with multiple lenders to determine which option is right for your financial situation.

Summary

A reverse mortgage can be appealing to seniors for various reasons. It offers financial flexibility by providing a tax free income stream, enabling seniors to cover daily expenses, healthcare costs, and financial obligations. The option to age in place is another significant advantage, as seniors can access their home equity without selling or moving. For retirees with limited savings, a reverse mortgage can supplement their retirement income, while it can also help clear high-interest debts and cover rising healthcare expenses. However, careful consideration and guidance from financial professionals are crucial to ensure the decision aligns with seniors’ specific circumstances and goals.

Please contact your financial advisor or one of the financial institutions listed above to review your options.