1. Special Mortgages

Reverse mortgage loans

Everything you need to know about reverse mortgages in Canada

Content last updated: June 17, 2020

Cashflow is a big concern for many older Canadians as they age and their income sources decline. For many, home equity represents their largest asset, and it plays a critical role in retirement planning, especially for those that weren’t able to take full advantage of an RRSP. Generally, the easiest way for seniors to unlock their home equity is to either sell the property or apply for a home equity line of credit (HELOC). If those options don’t make sense, retirement can be a financial struggle.

There is an option, however, that is sometimes overlooked. A reverse mortgage, a product specifically designed for Canadian retirees, is another way retirees can stay in their homes while accessing their property’s equity.

In the past, reverse mortgages have been seen as the opposite of good financial advice, getting seniors back into debt as they age. However, products have evolved over the years, and it could be worth reconsidering those old assumptions.

What is a Reverse Mortgage?

A reverse mortgage is a loan that allows a homeowner to convert some of the equity in their house into cash without having to sell their home. With a reverse mortgage, instead of being required to make monthly payments, the homeowner actually receives cash from the lender.

The loan will need to be repaid when the borrower moves out of their home, sells the home, or when the last borrower dies. Because a reverse mortgage reduces the equity you have in your home, it’s sometimes called “equity release”. However, your reverse mortgage provider doesn’t actually take an ownership share in your home, as is sometimes assumed.

One of the key features of a reverse mortgage over alternatives like a second mortgage or a HELOC is that a reverse mortgage does not require you to have an income to qualify. Both a second mortgage or a HELOC would need you to still have money coming in, which is not always the case for older Canadians.

One of the downsides of reverse mortgages is that they carry higher rates than conventional mortgages and slightly higher rates than HELOCs.

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How Does a Reverse Mortgage Work?

A reverse mortgage is the opposite of a regular mortgage. A reverse mortgage allows you to monetize a portion of your equity, without mandatory principal and interest payments. A simple way to think of it is that you’re taking out a loan in installments (or all at once), using your home as both the security for the loan and, in most cases, the asset that will eventually fund paying back the loan.

With a reverse mortgage, the lender advances you (the homeowner) a cash amount. This is to be repaid when the mortgage comes due (more on this later). You do have options to repay principal and interest, but if that’s not part of your plan, that’s fine. It’s important to know that, much like other loans, when interest isn’t paid, the total balance goes up (accrues) rather than down, as is the case with a standard amortizing mortgage.

Remember, home equity is:

With a reverse mortgage, your unpaid mortgage balance increases. However, this may be partially offset if your home appreciates over the same time period.

It’s important to note that reverse mortgage lender liens are registered in a similar fashion to traditional mortgage financing. You continue to retain homeownership and title to your home. As such, you are responsible for the maintenance of the property, including the payment of property taxes, condo fees, and fire insurance.

Reverse mortgage pros and cons

Reverse mortgages are not universally popular, and there are features of reverse mortgages found unsavoury by some. Firstly, the rates for reverse mortgages are higher than for both regular mortgages and HELOCs, which can lead to a faster accumulation of interest. Secondly, a reverse mortgage will erode the estate, which will reduce the amount you can leave to your children when you die.

However, there is a good response to both of these points. The rates on reverse mortgages can sometimes be reduced, with some lenders offering lower rates if you take the reverse mortgage amount out as a lump sum. It’s also worth noting that increases to home value can make up for the interest rate charged (although there is some speculation here).

As for inheritance, it should not be the sole focus of older Canadians to leave a financial legacy for their children, and it’s unfair to expect it to be. Certainly, leaving a financial inheritance should not be prioritized over living a healthy, happy, and dignified life.

Whether a reverse mortgage is right for you is a question for you and your family to answer. Speaking to an independent mortgage broker is a good way to start though, and it’s free to do so.

Pros of reverse mortgages

Cons of reverse mortgages

Do not require regular payments to be made on the loan. Ability to ‘withdraw’ cash from the value of your home without having to sell it. Easier to qualify: Reverse mortgages don’t require traditional income qualification standards. Funds received from reverse mortgages are entirely tax-free. Money from the reverse mortgage does not reduce your eligibility for Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.

Reverse mortgage interest rates are typically much higher than conventional mortgage rates, and slightly higher than HELOC rates. The more you borrow and the higher the rate, the faster the interest accumulates (and equity depletes). There are some initial costs associated with obtaining a reverse mortgage (home appraisal fee, application fee, closing costs, etc). Some of these costs are deducted from the advance, while others are required to be paid by the borrower(s). If you pass away, your estate is responsible for the repayment of the entire loan (including all of the accrued interest). This could result in your beneficiaries being left with a smaller inheritance than expected.

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How do you receive reverse mortgage funds?

Depending on your lender and plan, you may be able to get the money from your reverse mortgage loan either upfront (as a one-time lump sum) or partially upfront, with the rest spread out over time.

Opting for an upfront payment of a reverse mortgage will result in interest being charged on the entire loan from the first day. However, it may also result in you being charged a lower rate on the mortgage, depending on your lender.

Reverse mortgage eligibility

To be considered eligible for a reverse mortgage in Canada, you must be:

• A Canadian homeowner, and
• Aged 55 or older.

If you have a spouse and you are both on the title of the house:

• Both of you must be at least 55 years old to be eligible, and
• Both of you must be listed on the reverse mortgage application.

Additionally, the home you’re using to secure the reverse mortgage must be your primary residence. This usually means you have lived in the home for at least six months to a year, and you must continue to live in the home while the loan is outstanding.

If you currently have any other outstanding loans or lines of credit that are secured by your home, such as a mortgage or home equity line of credit (HELOC), you must pay it off when you get a reverse mortgage. If the loans are less than the funds available from the reverse mortgage, you can use the money from the reverse mortgage to pay them off.

Reverse mortgage borrower obligations

Because you will still retain ownership and occupancy of the home, you have several obligations. These include:

• Maintaining the property,
• Taking out an active fire insurance policy,
• Paying property taxes, and/or
• Paying condo fees.

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How to qualify for a reverse mortgage

To qualify for a reverse mortgage, lenders typically look at the following factors:

• Your age (and the age of your spouse if they are also registered on the title of your house)
• The equity you have in your home
• The appraised value of your home
• The location of your home

Typically, as long as you’re over 55 years old and have equity in a home that’s worth something, you’ll be approved for a reverse mortgage. Naturally, the older you are and the more home equity you have when you apply for the reverse mortgage, the more money you could get.

When is a reverse mortgage due?

The full outstanding balance of a reverse mortgage is required to be paid when the reverse mortgage comes due. The loan is due:

• When the home is sold (this is the most common outcome),
• When the last borrower no longer resides in the property (for a period of at least 6 months),
• When the last borrower dies,
• When property taxes stop being paid, or
• When condo fees stop being paid.

Canadian reverse mortgage providers

There are just two financial institutions that offer reverse mortgages in Canada: Equitable Bank and HomeEquity Bank. A third reverse mortgage provider, Seniors Money Canada, came to Canada from New Zealand in 2007, but no longer offers new loans.

Equitable Bank offers the Equitable Bank Reverse Mortgage, which is available through mortgage brokers in Alberta, British Columbia, Quebec, and Ontario.

HomeEquity Bank offers the CHIP Reverse Mortgage, which is available across Canada directly from HomeEquity Bank or through mortgage brokers.