What Is a Reverse Mortgage in Canada?

What is a reverse mortgage and how can you benefit from it in Canada?

Keep reading to learn more about this type of mortgage, including how it works, the eligibility requirements, and how much it will cost you.

What Is a Reverse Mortgage in Canada?

The Canadian reverse mortgage is essentially a loan that allows senior homeowners aged 55 and up to borrow money against the value of their home as part of their home equity. You don’t have to repay the loan as long as you live in it, and it doesn’t become due until you sell, move out, or pass away.

The funds can be used for anything, including supplementing your retirement funds, paying off debts, making home improvements, or covering unexpected expenses. When your loan term expires, the remaining balance, plus any accrued interest and fees, will be due. However, the overall home equity is usually lower than with a traditional mortgage.

The maximum amount that can be withdrawn from home equity is determined by factors such as your home’s value, age, and current interest rates. And these must be evaluated before a reverse mortgage loan can be approved.

Eligibility Requirements

To qualify for a reverse mortgage in Canada, you must meet the following requirements:

• Be at least 55 years old.
• Be the owner of a primary residence.

As part of your application, you must list all the people who live in your house. Furthermore, your lender may request that you or a member of your family seek independent legal counsel. This is usually a good idea because it ensures that you understand all the terms and conditions of your loan before signing anything.

When all the necessary steps have been completed, the lender will review your application and decide based on several major criteria, such as:

• Your age and the age of all the individuals living with you
• Your home’s location and type
• Your home’s current value and condition.

Once the value has been calculated, you’ll be able to borrow up to 55% of your home equity. The older you are, the more money you can borrow. This, however, is subject to change if the value of your home falls or interest rates rise.

How Much Does a Mortgage Reversal Cost?

Canadian reverse mortgages come with inherent costs as part of the loan. It’s important to be aware of these costs so that you can factor them into your decision-making process. The following are some of the fees and expenses associated with a reverse mortgage in Canada:

• Appraisal fee: The lender will hire an appraiser to determine your home’s value. This professional will come to your home and provide a report that will determine the maximum amount you can borrow. The cost of this service will be added to your loan.
• Higher interest rates: Because a reverse mortgage is a loan secured by your home, the interest rates are typically higher than those of traditional mortgages.
• Setup fee: This is a one-time fee charged by the lender to cover the costs of processing and approving your loan.
• Legal fees: Cost of hiring a lawyer to review your loan agreement and advise you on the legal implications of taking out a reverse mortgage, independent legal advice or when closing the loan.
• Prepayment penalty: if you repay your reverse mortgage before the due date

What Are the Costs for a Reverse Mortgage at Different Lenders?

Depending on the lender, reverse mortgage interest rates in Canada can vary. For instance, at Home Equity Bank, interest rates range from 7.34% to 8.34%, with the annual percentage rate coming in at 7.81% to 8.69% for the first 5 years. 

At EQ Bank, a division of Equitable Bank, the mortgage flex rates start at 6.89% for the first year and go up to 7.49% in year 5 of the loan term. As with Home Equity Bank, the rates may be subject to change after the 5-year mark.

How to Repay a Reverse Mortgage?

While regular payments are not required to repay a reverse mortgage plan, the loan plus interest must be repaid in full when the last surviving borrower dies, moves out of the property, or the property is sold.

In some cases, loan default can also result in foreclosure. This is possible if you do not follow the loan terms, do not live in the property as your primary residence, or do not pay your property taxes or insurance. In such cases, the lender may require the loan to be repaid in full.

One significant benefit of a reverse mortgage is the ability to make payments to reduce your loan balance at any time without penalty. Just make sure that prepaying the loan does not incur any additional fees.

If you die before repaying the loan, the remaining balance must be settled by your estate. If more than one person is named on the loan, the responsibility to repay the debt will be passed down to the surviving borrower as part of the inheritance.

Pros and Cons of a Reverse Mortgage

As with most things in life, there are pros and cons to getting a reverse mortgage. Because a reverse mortgage is a significant financial commitment, it is critical that you carefully weigh these factors before making a decision.

The pros of a reverse mortgage include:

• No regular monthly payments: One of the most significant benefits of a reverse mortgage is that you are not required to make regular monthly payments. This can free up some much-needed cash flow, especially in retirement.
• You still own your home: With a reverse mortgage, you keep ownership of your home. This allows you to convert some of its value into cash while still living in it.

• The amount borrowed is not taxed: The money you get from a reverse mortgage is not taxable income. As long as you live in your home, you will not be required to pay any taxes on the money.
• Borrowed funds do not affect OAS or GIC benefits: Both benefits can be used to supplement retirement income. Taking out a reverse mortgage will have no impact on the amount you receive from either of them.
• Variety of options for receiving the money: With a reverse mortgage, you have the flexibility to choose how you receive the money. You can take it as a lump sum, in monthly payments, or as a line of credit.

On the other hand, the disadvantages of a reverse mortgage are substantial and may include:

• Higher interest rates than other types of mortgages: Because a reverse mortgage is a type of loan, you’ll be charged interest on the money you borrow. The interest rates are usually higher than those of regular mortgages and can add up over time.
• Additional setup costs: Extra fees such as appraisal, legal, and administrative costs can pile up quickly. These are in addition to the interest you’ll be paying on the loan.
• You can only get out of a reverse mortgage if you pass away or sell your home: There’s no way to cancel a reverse mortgage before its term is up. It’s a life-long commitment that can only be ended if you sell your home or die.
• Only two institutions offer reverse mortgages in Canada: The lack of competition means that you may not get the best deal possible on your loan. The CHIP HomeEquity Bank and EQ Bank are the only two valid options currently available.

Alternatives to a Reverse Mortgage

Whether the reverse mortgage problems in Canada are worth the pros is something you’ll need to decide for yourself. And what are some alternatives if you don’t want to go that route?

Sell Your Home

There’s no shame in selling your home ⎯ it’s a big decision, but sometimes it’s the best one. If you have no emotional attachment to your current property and need money, selling is a perfectly viable option. The proceeds from the sale can be used to pay off debts, purchase a smaller home, or even invest for retirement.

Get Another Type of Loan

If you need money but don’t want to sell your house, another type of loan may be the way to go. In such cases, you can apply for a personal loan or a traditional mortgage. With one of these options, you’ll most likely be able to get a lower interest rate and save more money in the long run.

Buy a Smaller Home

Downsizing to a smaller home is another great way to save money. This option also has the advantage of being simpler to maintain and clean – a simple life can be very rewarding.

You can put the proceeds from the sale of your current home toward debt repayment, a down payment on a new business, or retirement savings. Even if the down payment is usually less than 25% of the purchase price, shedding a few pounds would be a welcome sight.

Apply for a HELOC

A HELOC (home equity line of credit) is a loan that uses your home equity as collateral. This allows you to borrow money against the appraised value of your home and usually gets a lower interest rate. Just be careful not to borrow more than you can afford, or you may lose your home if you can’t make the payments.

Rent a House or Apartment

Buying a home isn’t for everyone ⎯ some people prefer the freedom of renting. If you’re not ready to commit to a mortgage, paying rent may be the way to go. While it may not be as affordable in the long term, it does give you more flexibility.

Consider Assisted Living

If you’re finding it difficult to manage your home on your own, then assisted living in a retirement home or community could be the solution. This option gives you the chance to downsize and live in a supportive environment with like-minded individuals. Take your time researching the different options and finding the right one.

Finishing Thoughts

With all of that said, a reverse mortgage can still be a viable option for some people–it just depends on your situation. It might be worth considering if you’re struggling to make ends meet and need additional funds.

But remember, it’s not a decision to be made lightly. Make sure you conduct thorough research and consult with a financial advisor before accepting any binding agreements.