What is a reverse mortgage?
A reverse mortgage lets you get money from your home’s equity by borrowing up to 55% of your home’s current value. How much you can borrow will depend on your age, your home’s appraised value, and your lender.
How a reverse mortgage works
You need to pay off and close any outstanding loans or lines of credit that are secured by your home, including a mortgage or home equity line of credit (HELOC), before you can get a reverse mortgage. You can take the money from your reverse mortgage loan as a 1-time lump sum or by taking some money up front and the rest later.
With the money you get from a reverse mortgage, you can:
- Pay off outstanding debt, loans, or lines of credit
- Pay for home repairs or improvements
- Cover regular bills
- Pay healthcare expenses
A reverse mortgage may prevent you from qualifying for other financing options secured by your home (such as a HELOC).
Qualifying for a reverse mortgage
To get a reverse mortgage, you must be a homeowner and at least 55 years of age. Your reverse mortgage application must include everyone listed on your home’s title and they all must be at least 55 years old to be eligible. Your lender may also request that you and the others on your home’s title get independent legal advice and proof that you got this advice.
When you apply for a reverse mortgage, your lender will consider:
- Your age, and the age of others on your home’s title
- Where you live
- The condition, type, and appraised value of your home
Your primary residence must be the home you use to secure a reverse mortgage. This typically means you live in the primary residence for at least 6 months a year.
Paying back a reverse mortgage loan
You never need to make any regular payments on a reverse mortgage. While you may opt to repay the principal and interest in full at any time, you may have to pay a fee to do so.
You will be required to pay the amount left owing when:
- You sell your home
- You move out of your home
- The last borrower dies
- If you default on the loan
You can default on a reverse mortgage by:
- Using your reverse mortgage money for anything illegal
- Not being truthful on your reverse mortgage application
- Not maintaining the upkeep of your home in a way that would lessen its value
- Not following the contract conditions of your reverse mortgage
Different reverse mortgage lenders may have different definitions of defaulting on a reverse mortgage. Clarify with your lender what might cause you to default. When you die, your estate must repay the entire amount owing. If more than one person owns the home, the loan must be repaid when the last person dies or sells the home.
How long you or your estate has to repay a reverse mortgage depends on the situation. If you die, your estate may have 180 days to pay back the reverse mortgage. But if you move into long-term care, you might have a year to pay it back. Confirm with your reverse mortgage lender about the timing for paying back a reverse mortgage.
Where to get a reverse mortgage
In Canada, you can get a reverse mortgage through 2 institutions. The Canadian Home Income Plan (CHIP) is available across Canada directly from HomeEquity Bank or through mortgage brokers. Equitable Bank offers a reverse mortgage in some major urban centres.
What to ask a reverse mortgage lender
Make sure you get all the information you need to make an informed decision about getting a reverse mortgage including:
- Options to get money from a reverse mortgage
- Any fees you have to pay
- The interest rate you’ll pay on the money you borrow
- Things that could cause you to default on the loan
- What penalties you might pay if you sell your home within a certain period
- How long do you have to pay off the loan’s balance if you move
- How long your estate has to pay off the loan balance when you die
- Consequences if your estate takes longer than the stated period to fully repay the loan when you die
- Consequences if the loan amount ends up being more than your home’s value the time you need to pay back the loan
Pros and cons of a reverse mortgage
Carefully weigh the advantages and disadvantages of a reverse mortgage before you decide.
Pros
- There are no regular loan payments to make
- You don’t need to sell your home to be able to turn some of its value into cash
- You’re not taxed on the money you borrow
- Money from a reverse mortgage won’t affect Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits
- You continue to own your home
- There are options for how and when you receive money from your loan
Cons
- Interest rates are higher than most other types of mortgages
- Your home equity may decrease as interest accumulates on your loan
- When you die, your estate must repay the loan and interest within a set period
- It may take longer to settle an estate than the time the lender allows to repay a reverse mortgage
- You may end up with less money in your estate to pass on to your children or other beneficiaries
- A reverse mortgage may have higher costs than a regular mortgage or other credit products
Alternatives to a reverse mortgage
Before you decide on a reverse mortgage, make sure you explore the costs of other options:
- Selling your home and buying a smaller, less-expensive home
- Selling or renting out your home and renting another home or apartment
- Selling your home and moving into assisted living or other alternative housing
- Taking out a personal loan or line of credit
What’s a HELOC?
A home equity line of credit (HELOC) lets you borrow only the amount of money you need and use your home equity as collateral. Let’s compare a reverse mortgage to a HELOC.
HELOC
- 2-3% lower interest rates than a reverse mortgage, often prime rate plus 0.5%.
- You can borrow up to 55% of your home’s value.
- You don’t have to repay anything until you sell your home or move.
- No risk of losing your home as long as you comply with the reverse mortgage terms.
- Qualification is based on your home, its location, and your age.
- You must own your home.
Reverse mortgage
- Interest rates are typically higher than a HELOC.
- You can borrow up to 80% of your home’s value minus your mortgage.
- You start paying interest once you start borrowing money.
- If you miss payments you could lose your home.
- Qualification includes your income and credit score. You must prove you have enough income to pay down the debt.
- You must own your home.