Reverse Mortgage Canada

For many Canadians heading into retirement, managing cash flow becomes a growing concern. Over 75% say they worry they won’t have enough money in retirement due to rising living costs. In these situations, tapping into home equity can offer much-needed financial relief. One option is a reverse mortgage: a loan designed for homeowners aged 55+ that turns part of your home equity into tax-free cash, without requiring monthly payments or giving up ownership. Once seen as a last resort, reverse mortgages are now a viable alternative to downsizing or applying for a HELOC.

Let’s break down how reverse mortgages work in Canada, who qualifies, and what the pros and cons are.

What is a reverse mortgage?

A reverse mortgage is a type of loan that allows Canadian homeowners aged 55 or older to access some of their home equity as tax-free cash, without selling the house or making monthly payments. While periodic payments aren’t required, you can choose to make voluntary payments to keep the interest from accumulating too quickly. 

Because a reverse mortgage reduces the equity you have in your home, it’s sometimes called an “equity release.” A common misconception is that the lender takes ownership of your home, but you retain full title and are still responsible for property taxes, insurance, and maintenance.

How does a reverse mortgage work?

A reverse mortgage is the opposite of a regular mortgage. Instead of making monthly payments to build equity, you borrow against the equity you’ve already built and receive that money from the lender, either all at once, in instalments, or a combination of both. Once you apply for a reverse home mortgage with either the Equitable Bank or the HomeEquity Bank, the lender assesses your home’s value, your age, and how much equity you have to determine how much you can borrow (typically up to 55% of your home’s current value).

Interest begins to accrue on the amount you withdraw, and it’s added to your reverse home loan balance. Since no regular payments are required, your balance grows rather than shrinks, unlike a standard mortgage, where each payment reduces what you owe.

Your home acts as both the collateral for the loan and, eventually, the source of repayment. When the loan comes due, borrowers repay the full amount – the principal plus accumulated interest – usually from the proceeds of the home sale. 

When is a reverse mortgage due?

A reverse mortgage becomes due — meaning the full loan balance must be repaid — under the following circumstances:

• When the home is sold,
• When the last borrower no longer resides in the property (for a period of at least six months),
• When the last borrower dies,
• When property taxes stop being paid, or
• When condo fees (if applicable) are no longer being paid.

If the borrower passes away or moves into long-term care, the estate is responsible for repaying the loan, typically using the proceeds from the sale of the home. Any remaining equity after the reverse mortgage is repaid goes to the estate and can be distributed to heirs or beneficiaries.

Most lenders allow between 180 days to one year for the reverse home loan to be repaid, depending on the provider and the specific situation.

Reverse mortgage borrower obligations

Because you retain ownership and occupancy of the home under a reverse mortgage, you’re responsible for several ongoing obligations, including:

• Maintaining the property
• Taking out an active fire insurance policy
• Paying property taxes
• Paying condo fees
• Living in the home as your primary residence (usually at least six months of the year)
• Not taking on additional secured debt like a second mortgage or HELOC
  
  

Can you default on a reverse mortgage? 

Yes, there are ways to default on a reverse home mortgage. Your lender can demand the funds back in case you:

• Misrepresent your financial situation on your reverse mortgage application
• Use the funds for illegal purposes
• Fail to keep your home in good condition, to the point that it impacts its value
• Don’t pay property taxes or home insurance
• Fail to follow any conditions laid out in your reverse mortgage contract

If you default, the lender can demand full repayment of the loan, which may lead to the forced sale of your home. That said, lenders generally work with borrowers to resolve the issue, especially if it’s due to missed taxes or insurance.

Reverse mortgage eligibility

To be considered eligible for a reverse mortgage in Canada, you must meet the following criteria:

• Be a Canadian homeowner
• Be 55 years of age or older
• Use the property as your primary residence (you typically need to have lived there for at least six months to a year)

If you have a spouse and both of you are listed on the title, you both must be at least 55 years old and included on the application. A reverse mortgage doesn't require income or credit qualification. The trade-off is that interest rates are generally higher, usually slightly above HELOC rates and about two points above traditional mortgage rates.

In addition to these basic requirements, lenders will also assess:

• Your age (and your spouse’s, if applicable)
• The appraised value of your home
• The amount of equity you’ve built up
• The location of your home

Generally, the older you are and the more equity you have, the more you’ll be eligible to borrow, up to 55% of your home’s value. 

If you currently have an outstanding mortgage or a line of credit secured against your home, you must pay it off when you get a reverse mortgage. You can even do this using a portion of the reverse mortgage funds.

How to calculate your reverse mortgage amount

Generally, homeowners can borrow up to 55% of the current value of their home. However, as the loan is secured against the equity in your home, the reverse mortgage lender will also determine the reverse mortgage size based on your home’s equity. The formula to determine your home equity is:

• Home equity = Value of home - Unpaid mortgage balance

For example, let’s say you have a home that’s worth $1 million, and you have $250,000 remaining on the mortgage. Your equity would be $750,000 ($1,000,000 - $250,000). Your lender will use this number, along with your age and home details, to determine your borrowing limit. The older you are and the more equity you have, the closer you’ll get to that 55% cap.

Keep in mind that while your mortgage balance will grow over time as interest accrues, rising home values may partially offset that increase.

Reverse mortgage pros and cons

If you’re still wondering if reverse mortgages are a good idea, let’s look at the key considerations.

Advantages of reverse mortgages-

• You’re not obligated to make regular monthly payments on the loan or interest, unless you choose to.
• The money you receive is not taxable and can be used however you wish.
• You can access equity without selling the house, allowing you to age in place.
• No income or credit score requirements to qualify, makes it more accessible for retirees.
• Receiving reverse mortgage funds won’t impact eligibility for Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.

Disadvantages of reverse mortgages-

• Rates are typically higher than those for traditional mortgages and HELOCs.
• As interest accumulates, your home equity declines, especially if you borrow more or hold the loan longer.
• Expect to pay fees for the appraisal, legal work, and closing. Some of these costs are upfront, while others are deducted from the advance.
• The loan must be repaid by your estate when you pass away, which may reduce the inheritance left for your heirs.

Before deciding, it’s a good idea to speak with an independent mortgage broker who can explain how a reverse mortgage would fit into your specific financial situation.

What is a reverse mortgage credit card?

The Bloom Home Equity Prepaid Mastercard is a credit card-style product that lets homeowners access their home equity in smaller, recurring amounts — instead of receiving a lump sum like with a traditional reverse mortgage.

For example, a borrower may be approved for a pre-set monthly amount (e.g. $1,000), which is loaded onto the card and can be spent as needed. Interest is charged on the borrowed amount and added to the overall reverse mortgage balance. Borrowers can choose to make payments on the card, or repay the full amount later through the sale of the home or from their estate after they pass away.

To qualify, homeowners must be 55 or older, own their home, and have sufficient equity.

This product offers a more flexible way for older Canadians to manage monthly expenses while staying in their homes. However, as with any revolving credit product, it carries the risk of overuse – and may reduce the equity available in the long term. 

Reverse mortgage vs. HELOC 

Both reverse mortgages and home equity lines of credit (HELOCs) allow you to access the equity in your home, but they work quite differently.

Also read:

• How much money should I have saved for retirement?
• What Happens to Your RRSP When You Retire?
• Why paying down your mortgage early is not always the best idea?
• Mortgage refinance
• The do's and don’ts of using a HELOC
• How To Set Yourself Up For a Comfortable Retirement