Reverse Mortgage Loans

For Canadians reaching retirement age, cash flow can be a main concern; often, their income sources have declined, and they may find it difficult to qualify for the same kind of credit as they would have during their prime earning years.

For many seniors, their home is by far their largest financial asset, as they’ve built up equity over years of paying down their mortgage; many older homeowners may be mortgage-free and own their home outright, or be nearing the final years of their mortgage amortization. However, this can put them in a “house-rich, cash-poor” situation, as that cash is tied up in their home.

Tapping into this equity plays a critical role in retirement planning, especially for seniors who aren’t able to take full advantage of an RRSP. There are several options for accessing this value; they could sell off their home and downsize, either purchasing a smaller property or renting. Taking out a home equity line of credit (HELOC) is also a common solution.

However, these options don’t always make sense for retirees; they may wish to continue living in their family home, and qualifying for a HELOC can become harder due to their lower income stream. This is where reverse mortgages come in; this product, which is designed specifically for Canadian retirees, allows homeowners to pull equity out of their home as cash, while retaining full ownership of, and continuing to live in, the property.

In fact, reverse mortgage usage has been on the rise in recent years; HomeEquity Bank, one of the two providers of reverse mortgages in Canada, recently reported that the number of these loans taken out in 2022 was 30% higher than in the year before, accounting for a total portfolio of $6.3 billion. This is partly due to rapidly rising interest rates and inflation over the course of 2022, which has negatively impacted the cost of living for many Canadians. As more baby boomers are retiring in this tough economic climate, they’re turning to their home equity to help offset these costs and support their lifestyles.

However, in the past, getting a reverse mortgage hasn’t always been viewed as good financial advice; it puts seniors back into debt as they age, and can reduce the overall value of their estate. But these products have evolved in recent years – it could be worth reconsidering whether they’d be a fit for your specific financial situation.

 

What is a reverse mortgage?

A reverse mortgage is a loan that allows a homeowner to convert some of the equity in their home 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.

A key feature of a reverse mortgage is that it does not require you to have income to qualify, unlike products such as HELOCs or second mortgages. The trade off for this, however, are higher interest rates than a conventional mortgage, and slightly higher than those of a HELOC.

Can I get a reverse mortgage if I have an existing mortgage?

Yes, though you cannot carry both an existing primary mortgage and reverse mortgage at the same time; you will be required to use the reverse mortgage funds to pay down your first mortgage – as well as any existing line of credit balances – before you can use the money for other purposes.

What are the rules for a reverse mortgage?

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 instalments (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.

 

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.

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.

How to calculate your reverse mortgage amount

The formula to determine your home equity is:

• Value of Home - Unpaid Mortgage Balance = Home Equity

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.

 

Are reverse mortgages a good idea in Canada?

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, which compounds monthly. 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.

 

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.

What is a reverse mortgage credit card?

A fairly new addition to the Canadian personal finance products landscape, reverse mortgage provider Bloom Finance Company has introduced a credit card-like product that allows borrowers to tap into their home’s built-up equity.

Unlike with a traditional reverse mortgage, in which a large lump sum is pulled out of the home’s equity, the Bloom Home Equity Prepaid Mastercard allows borrowers to access smaller amounts of money on a regular basis; for example, a pre-authorized amount of $1,000 on a monthly basis. This amount is added to the card each month, and the borrower can spend it however they choose. The loan – along with interest – is then added to the mortgage balance. Borrowers can either choose to make payments on the card, or simply pay it off with proceeds from either selling their home, or from their estate after they pass away. In order to qualify, borrowers must be over the age of 55, own their own home, and have sufficient equity built up.

The card has received praise for being a solution for seniors who need a financial top up each month in order to cover regular expenses. However, just like a traditional reverse mortgage, this product comes with the risk of drawing down too much on your equity, and draining a hard-built real estate nest egg. Like a HELOC and regular credit card, this is a revolving form of debt, which builds up over time; in general its use requires a disciplined approach from the borrower in regards to using their home equity as cash flow.

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.

What are the costs associated with a reverse mortgage? 

In addition to the interest you’ll pay on your reverse mortgage loan amount, there are additional upfront costs, such as paying for a home appraisal and set-up fee. Homeowners should also receive independent legal advice, along with paying for lawyer fees for title insurance and registration.

What can you use a reverse mortgage for?

Anything you like! While the most common use for reverse mortgage funds is to help offset a fixed income and pay for regular cost-of-living expenses, some borrowers use the money to upgrade their home, travel or pay off other debts. Using a reverse mortgage to consolidate and pay off debt is a popular tactic, as the rate will be lower than those charged by consumer debt providers.

Reverse mortgage funds can also be used to provide monetary support to family members, such as giving an early inheritance to children or grandchildren, or even paying for their own real estate down payment. Seniors who wish to age in place may also use the money to outfit their property with accessibility features, or pay for in-home care.

 

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.

In the case of the last borrower passing away or moving into long-term care, the estate is then responsible for paying off the reverse mortgage balance. The amount for this to occur can depend on the provider and the circumstances, typically between 180 days to a year.

Can you default on a reverse mortgage? 

Yes, there are ways to default on a reverse 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
• Fail to follow any conditions laid out in your reverse mortgage contract

Canadian reverse mortgage providers

There are just two financial institutions that offer reverse mortgages in Canada: Equitable Bank and HomeEquity Bank. 

Equitable Bank offers the Equitable Bank Reverse Mortgage, which is available through mortgage brokers in certain major urban centres 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.

Reverse mortgage vs HELOC 

The main difference between a reverse mortgage and a home equity line of credit is that a HELOC is a form of revolving credit debt with no repayment deadline. HELOC lenders require borrowers to be in good financial standing, with a source of income and healthy credit score. As well, a HELOC can tap into up to 65% of the home’s equity, compared to 55% with a reverse mortgage, and the amount available is dependent on the home’s existing equity, rather than the homeowner’s age.

Sources:

• Government of Canada - Reverse Mortgages
• HomeEquity Bank