What is a Reverse Mortgage?

A reverse mortgage lets homeowners who are 55 years or older access the equity in their home without needing to sell it. Unlike traditional mortgages, there are no monthly payments required, and the loan is paid back when the homeowner sells the home, moves out, or passes away. Retirees often use this financial product for extra income in their later years. However, reverse mortgages can offer essential funds but come with significant costs and risks.

How Reverse Mortgages Work

A reverse mortgage converts part of your home’s equity into loan proceeds, which can be distributed in various ways like lump sums, monthly payments, or a line of credit. These funds are non-taxable, and repayment only occurs when the home is sold or vacated. Loan amounts depend on factors like the home's value, the owner’s age, and current interest rates. The most popular reverse mortgage in Canada is Home Equity Bank's "HELOC for Seniors," among other options available from different lenders.

Types of Reverse Mortgages

In Canada, the reverse mortgage market is less varied than in the United States and is primarily offered by two banks:

HomeEquity Bank (CHIP Reverse Mortgage)
Equitable Bank (Reverse Mortgage)

Typically, these banks offer the following loan forms:

Lump Sum
Regular payments (like monthly)
On-demand drawdown (similar to a line of credit)

Reverse Mortgage Pros and Cons

Reverse mortgages have pros and cons that need careful consideration before proceeding.

Pros:

No Monthly Payments: Unlike traditional mortgages, no monthly payments are required. The loan is settled when the home is sold, the owner moves into care, or passes away.
Access to Cash: Facilitates seniors accessing their home equity without selling, providing a steady income source.
Non-Taxable Income: The proceeds are not taxed, potentially making it tax-efficient for retirees.
Flexibility in Payment Options: Homeowners can select from a lump sum, monthly payments, or a line of credit to suit their needs.

Cons:

High Fees: Reverse mortgages generally have higher fees and interest rates compared to other loans.
Decreasing Equity: Interest accumulation increases the loan balance over time, reducing home equity and potential inheritance.
Impact on Inheritance: If the loan exceeds the home's value at repayment, heirs might receive nothing as the home is sold to repay the debt.
Eligibility Requirements: Not all qualify; homeowners must be at least 55 years and meet certain home criteria.

Reverse Mortgage Fees

Fees associated with reverse mortgages can vary but typically include:

Origination Fees: Charged by lenders for processing and setting up the loan, ranging from a few hundred to several thousand dollars based on size and lender.
Interest Rates: These are usually higher than traditional mortgages since regular payments aren’t demanded, and the balance grows over time.
Insurance Fees: Some loans require insurance to safeguard the lender if the home’s repayment value is less.
Closing Costs: Similar to traditional mortgages, including appraisal, legal fees, and title insurance.

These fees should be considered in determining if a reverse mortgage suits your needs.

How Much Money Do You Get from a Reverse Mortgage?

The borrowable amount via a reverse mortgage depends on:

Home Value: A higher home value allows more borrowing potential.
Age of the Homeowner: Older homeowners might borrow more as the lender expects earlier repayment.
Current Interest Rates: Lower rates increase borrowable amounts since they affect the loan over time.
Equity in the Home: More equity translates to more accessible funds.

Homeowners typically may borrow 30% to 55% of their home’s appraised value, depending on these factors.

Common Problems with Reverse Mortgages

Though beneficial, reverse mortgages pose serious potential issues:

Increased Debt Over Time: With no monthly payments, accruing interest raises the loan balance, eroding home equity.
Potential Impact on Government Benefits: Reverse mortgage money might affect eligibility for certain government benefits like Canada's Guaranteed Income Supplement (GIS); consulting a financial advisor is crucial.
Risk of Losing the Home: Non-compliance with loan terms, such as paying property taxes or insurance, can lead to foreclosure.

Reverse Mortgage Alternatives

Before opting for a reverse mortgage, consider these alternatives:

Home Equity Line of Credit (HELOC): Often better if you’re below the reverse mortgage age threshold and have sufficient income, offering lower interest rates and flexible repayment.
Selling Your Home: Downsizing can grant necessary cash access without reverse mortgage complications if staying at home is undesirable.
Government Benefits and Grants: Seniors might qualify for additional government aid, like the Canada Pension Plan or provincial programs, addressing financial needs.

The Truth About Reverse Mortgages: What You Need to Know Before You Borrow