Reverse Mortgage in Canada: How Seniors Unlock Home Equity

Unlock your home’s equity with a reverse mortgage, and enjoy your retirement!

• For Canadian homeowners aged 55+
• Access up to 59% of the home value
• No monthly payments

What is a Reverse Mortgage?

A reverse mortgage is a unique loan that converts a percentage of your home equity into cash while you continue to live in your home. It is specified for homeowners over 55. With a traditional mortgage, you pay the lender to pay down your principal over time. A reverse mortgage works the opposite way – the lender advances you money, and your debt grows as interest accumulates.

Unlike regular mortgages or home equity loans, reverse mortgages do not require monthly repayments. They are sometimes called “equity release” because they allow you to release a portion of your home equity as spendable funds.

How Does a Reverse Mortgage Work?

A reverse mortgage works differently than a traditional forward mortgage in several key ways:

You receive money rather than make payments: Reverse mortgage lenders advance money as a lump sum, through scheduled advances, or a line of credit.

Your equity is reduced rather than increased: Regular mortgages build equity with each payment. This mortgage reduces your equity over time as interest accumulates on the loan.

Repayment isn’t required until a triggering event: You must not repay monthly. The loan only becomes due when you sell the home, move out permanently, or pass away.

Interest accrues over time: Because you aren’t making payments, interest gets added to your monthly loan balance. This means your total debt grows larger the longer you have the mortgage.

You retain ownership: With a reverse mortgage, you still legally own your home. The lender places a lien on the property, but ownership remains in your name.

Lender protections: Reverse mortgages have built-in protections for lenders, such as no negative equity guarantees. This ensures the loan won’t exceed the value of your home.

Are You Qualified For a Reverse Mortgage in Canada?

To qualify for a reverse mortgage in Canada, homeowners must meet specific eligibility criteria:

• Minimum age: The minimum age is 55. All borrowers on the title must be at least 55.
• Home value: The property must have a minimum value, often $250,000 or higher.
• Location: The home must be located in an eligible area. Some lenders have geographic restrictions.
• Private residence: The home must be your primary residence, where you live for at least 6 months per year.
• Ownership: You must have full legal ownership of the home. Shared ownership may disqualify you.
• Title: All parties on the title must apply together and meet eligibility criteria.
• Existing mortgages: Any existing or secured debts must be paid off first.
• Property taxes & insurance: These must be up-to-date and maintained.

Reverse mortgage eligibility is primarily based on age and equity rather than income or credit score. Pre-qualifying online can help you determine if you may be eligible.

Where Can You Get a Reverse Mortgages in Canada?

While regular mortgages are widely available from banks, credit unions, and mortgage brokers, only a handful of lenders currently offer them in Canada.

Home Equity Bank CHIP Reverse Mortgage

Home Equity Bank is the leading reverse mortgage lender in Canada. With over 30 years of experience, they offer the CHIP Reverse Mortgage across the country and hold the majority of market share. Their product provides flexible payout options and competitive rates. The main downside is that rates are slightly higher than Equitable Bank.

Equitable Bank Reverse Mortgage

Entering the market in 2018, Equitable Bank offers Reverse mortgages in major urban centers through independent mortgage brokers. Their rates tend to be lower than CHIP. However, Equitable Bank has limited availability and only serves major urban centers now. They are a good option for lower-value homes.

Bloom Reverse Mortgage

Bloom Finance offers the unique Bloom Reverse Mortgage. This functions like a credit card, allowing borrowers to access small amounts of equity each month. It provides flexibility but requires discipline to avoid overspending. There are also higher fees than a traditional one.

Fraction Mortgage

Fraction lets homeowners sell up to 50% of their equity share in exchange for a lump sum payment. This allows borrowers to retain half their home ownership and appreciation. The main risk is missing out on a larger share of future home equity gains.

What are the Pros and Cons of Reverse Mortgages?

Reverse mortgages offer unique benefits but come with risks to consider.

To better understand and weigh the pros and cons, explore common reverse mortgage horror stories in Canada

Calculating Your Reverse Mortgage Loan Amount

Your eligible loan amount depends primarily on your age, home value, and the lending limits your lender sets. The maximum loan amount is based on a percentage of your home equity. Typically, lenders will lend:

• Up to 55% of your home’s value if you are younger than 65
• Up to 60% for those aged 65-79
• Up to 55% for those aged 80+

The formula to determine your available equity:

Home Value – Mortgage Debt = Available Equity

For example:

$500,000 home value – $100,000 mortgage balance

= $400,000 in available equity

If you were 68, up to 60% of $400,000 could be advanced, equaling $240,000 in available funds.

Higher home values let homeowners qualify for larger loan amounts. The older you are, the higher the percentage you can access, up to a limit.

What are the Costs of a Reverse Mortgage?

When taking out a reverse mortgage, homeowners incur interest charges like other mortgages:

• Interest rates: Range from 6-8% fixed to variable rates over 10%. Rates are generally higher than traditional mortgages.
• Closing costs: Application fees, appraisal fees, and other closing costs typically range from $1,500 to $5,000. Some fees may be financed into your mortgage.
• Prepayment penalties: Paying off your mortgage early comes with penalties, often equivalent to several months’ interest. This
• covers the lender’s lost revenue.
• Servicing fees: Ongoing administrative fees include mortgage insurance premiums and servicing fees, around 1.5% – 2% of your outstanding loan balance per year.

While reverse mortgage rates may seem high compared to regular mortgages, the cost may be worthwhile if the funds provide financial security and improved retirement living.

How to Receive Your Reverse Mortgage Funds?

When your reverse mortgage closes, you can receive the approved loan amount in two main ways:

Lump Sum Payment

You receive the entire approved loan amount in one initial lump sum payment. The full principal is then used to calculate interest charges.

Installments

You receive a portion upfront; then, the rest is distributed over time through scheduled installments. This spreads out your available funds and moderates ongoing interest growth.

Many lenders initially require a minimum upfront draw – at least $25,000. The remainder can be taken through pre-set installments or requested ad hoc payments.

3 other options for receiving funds include:

• Line of credit: Access funds as needed through a standby line of credit. Interest accumulates as you draw funds.
• Credit card: The Bloom Home Equity Prepaid Mastercard allows borrowers to access small amounts each month.
• Shared appreciation: Fraction Mortgage lets you sell a share of your home’s equity for cash upfront.

How you receive the funds depends on your spending needs and plans for the money. Your independent mortgage specialist can help you select the best payout option.

Repay a Reverse Mortgage Loan

A significant benefit of a reverse mortgage is that there are no required monthly repayments. The loan only becomes due under certain triggering events:

• Sale of the home: The mortgage must be repaid from the sale proceeds when the home is sold. This is the most common repayment event.
• Moving out: If the borrower permanently moves out, the loan becomes due within 6-12 months.
• Last borrower passes away: The loan must be repaid when the last borrower dies, typically within 6-12 months. The borrower’s estate is responsible for repayment.
• Default: Failing to pay property taxes or insurance premiums or not maintaining the home may trigger mandatory repayment.

Most reverse mortgages have a non-recourse clause, meaning your repayment obligations cannot exceed the net sale value of your home, even if equity is completely depleted. This helps prevent situations where the mortgage exceeds the property’s value.

Alternatives to Reverse Mortgages in Canada

Before committing to a reverse mortgage, it helps to understand other options for accessing home equity:

Sell Your Home and Downsize

Selling your current home allows you to access 100% of your equity. If you downsize to a condo or smaller property, you pocket the difference while reducing expenses. However, moving can be challenging, and you lose your current home.

Get a HELOC

HELOCs let you borrow against your equity via a revolving line of credit. Interest rates are lower than reverse mortgages. However, you must be able to qualify and afford interest-only payments.

Sell Shares of Your Home Equity

New options like Fractional Mortgages let you sell a portion of your home’s equity up to 50% in exchange for a lump sum payment. You retain half ownership and split future appreciation.

Rent Out a Room

Bringing in rental income from extra rooms like a basement apartment can provide cash flow. However, becoming an at-home landlord has risks that not all seniors may be willing to take on.

Are Reverse Mortgages Right for You?

Reverse mortgages let Canadian homeowners convert their home equity into tax-free funds without selling or vacating the property. However, higher interest rates make accessing equity expensive in the long run.

A reverse mortgage may make sense if:

• You have limited income but significant untapped home equity
• You wish to stay living in your current home during retirement
• Covering healthcare and living costs is a concern
• You lack other assets to supplement retirement income

However, it may be less beneficial if:

• You expect to move within 5-10 years
• Want to preserve equity to leave an inheritance
• Are you open to downsizing or relocating
• Can qualify for lower-cost loans like a HELOC

Determining if a reverse mortgage is right requires examining your unique financial situation. An experienced mortgage broker can review your options and help you make the most appropriate decision.

Speak to our mortgage brokers at Best Mortgage Online today to review your situation and see if a reverse mortgage may help provide retirement security and income. With proper research and advice, a reverse mortgage can be a valuable part of your retirement strategy.

FAQs about Reverse Mortgages in Canada