What Is A Reverse Mortgage In Canada
Reverse mortgages in Canada are designed for homeowners aged 55 and older. You can access your home equity, make no mortgage payments and stay in your home for as long as you choose. You can use the funds for anything you like, such as unexpected expenses, day-to-day spending, travel, home renovations, debt consolidation or assisting your adult children with their down payment or tuition expenses. Once approved, you can choose to receive the tax-free payments all at once or monthly or, as needed.
You maintain ownership of your home until you move or sell.
Reverse Mortgages In Canada: Explained In 5 Minutes
Purchasing a home requires careful financial planning but monetary obligations do not stop there. Owning a property is an asset but being a homeowner does not help to manage your day-to-day bills and expenses. In fact, many Canadians would classify themselves as being house poor, which can put strain on budgets and portfolios but a reverse mortgage can help!
How Much Can You Borrow With A Reverse Mortgage
The proceeds that youll receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount that you can borrow will be based on the youngest borrowers age, the loans interest rate, and the lesser of your homes appraised value or the FHAs maximum claim amount, which is $822,375 as of Jan. 1, 2021.
However, you cant borrow 100% of what your home is worth, or anywhere close to it. Part of your home equity must be used to pay the loans expenses, including mortgage premiums and interest. Here are a few other things that you need to know about how much you can borrow:
- The loan proceeds are based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
- The lower the mortgage rate, the more you can borrow.
- The higher your propertys appraised value, the more you can borrow.
- A strong reverse mortgage financial assessment increases the proceeds that youll receive because the lender wont withhold part of them to pay property taxes and homeowners insurance on your behalf.
How much you can actually borrow is based on whats called the initial principal limit. In January 2021, the maximum initial principal limit was $822,375. The average borrowers initial principal limit is about 58% of the maximum claim amount.
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What Is The Best Reverse Mortgage Rate
The answer to that depends on what term you prefer. A 5-year fixed reverse mortgage rate, for example, is usually at least two-thirds of a percentage point greater than a variable or 1-year fixed. The longer the term, the higher the rate.
Given the same term, however, theres not much difference in rates between lenders . Thats because theres very little competition in Canadas reverse mortgage market. The two leaders in the industry, HomeEquity Bank and Equitable Bank, price very close to one another so as to maximize margins.
Below are some of the more frequently asked questions about reverse mortgages
How Much Have Reverse Mortgages Grown In Canada
Reverse mortgage balances are growing nearly eight times faster than regular mortgage debt in Canada, according to the Office of the Superintendent of Financial Institutions. In 2017, Canadian reverse mortgage balances rose to $2.69 billiona whopping 45% increase from the year before.
In 2017, HomeEquity Bank reported growth of 32.5% over 2016, with total reverse mortgage originations of $608 million. Theyre projecting to close more than $800 million worth in 2018.
On a per capita basis, that is still a small fraction of the business closed in more established markets, like the U.S. and Australia.
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Cons Of Reverse Mortgages
- Although the interest rates on reverse mortgages have come down a lot in recent years due to the low interest rate environment, rates on reverse mortgages are still higher than most other mortgage products available. Youre typically looking at an interest rate thats between 1.50 percent and 2 percent higher than a home equity loan. Thats because the reverse mortgage lender may have to wait years to receive any repayment at all.
- The equity youve worked so hard to build up over the years may dwindle as the interest on your reverse mortgage adds up over the years.
- Your estate will be responsible for repaying your reverse mortgage loan and the interest within a specified time period when you pass away. If you want to leave something to your estate, this could leave your family with next to nothing once the reverse mortgage lender is paid off.
- A reverse mortgage may prolong the time it takes to settle your estate.
- The fees with a reverse mortgage may often be more than a traditional mortgage and other similar lending products.
- If you have any lines of credit secured against your home, you may be forced to close them. Thats because the reverse mortgage lender will want to be in first position should anything happen to your home.
- It is possible to default on your reverse mortgage. For example, if you let your home fall into disrepair, the reverse mortgage lender could call the loan.
Who Offers Reverse Mortgages In Canada
There are currently just two mainstream Canadian reverse mortgage providers.
The best known is HomeEquity Bank, which offers its CHIP reverse mortgage. HomeEquity Bank was the countrys first reverse mortgage lender.
Equitable Bank is a newer competitor, having launched in 2018. It offers the PATH reverse mortgage.
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What If You Dont Qualify
If you dont qualify for any of these loans, what options remain for using home equity to fund your retirement? You could sell and downsize, or you could sell your home to your children or grandchildren to keep it in the family, perhaps even becoming their renter if you want to continue living in the home.
How Does A Reverse Mortgage Work When You Die
Its important to have a plan to deal with your reverse mortgage loan after you die. Family members also need to understand their options for keeping the house, as well as their payment responsibilities. Repaying the loan can get complicated, depending on how much equity you have in your house and whether you want the house to stay in your family after your death.
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Reverse Mortgages In Canada: The Pros And Cons
Thereâs been a lot of talk about reverse mortgages over the past few years, with supporters and opponents both being very vocal. Reverse mortgages are used by older Canadians to provide a source of retirement funds, and with more than 60% of Canadians concerned theyâll outlive their retirement savings, itâs no surprise reverse mortgages are a talking point .
However, there are pros and cons to getting a reverse mortgage. Hereâs everything you need to know about reverse mortgages in Canada.
What Exactly Is A Reverse Mortgage
A reverse mortgage is a speciality mortgage product only made available to people in Canada over the age of 55. In Canada, there is the CHIP Reverse Mortgage as it is a renamed version of a product that used to be called CHIP offered by Home Equity Bank or the PATH Reverse Mortgage offered by Equitable Bank.
It gets its name from the fact it is almost the opposite of a traditional mortgage in that there is no credit score requirement, you dont need income to qualify and there are no monthly payments. So the lender is paying you money, without the requirement that you repay any of it which is why it is considered the reverse of a traditional mortgage.
This can lead many people to be suspicious of a reverse mortgage because it seems too good to be true.
However, there is still interest charged on the mortgage with the rate being a little bit higher than a Home Equity Line of Credit and more higher than a traditional mortgage.
Basically, you have to take on a slightly higher interest rate on the mortgage to get all the benefits of a reverse mortgage. However, the interest rate is still not as high as an unsecured line of credit, personal loan or credit card.
For more on the interest rates and the things you need to know, check out this article: Reverse Mortgage Rates And Penalties.
So this is not a handout and not a free lunch the lender does get something in return, making it a viable product for them to offer.
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General Reverse Mortgage Questions
How do I qualify for a reverse mortgage?
How much equity can I access?
Can I get a reverse mortgage with bad credit?
With a reverse mortgage, who owns the house?
Could I owe more than my house is worth with a reverse mortgage?
What options do I have for receiving my reverse mortgage funds?
Who is responsible for paying property taxes for a reverse mortgage?
What is a reverse mortgage holdback, and when is it done?
Can a Power of Attorney apply for a reverse mortgage on my behalf?
Can I receive counselling about reverse mortgage loans from Equitable Bank?
How can I use the funds from a reverse mortgage?
You could use the funds to cover daily expenses, home renovations, medical bills, in-home care, family needs, trips, or help a relative with a down payment, its up to you.
We also offer a range of home-financing solutions. You can work with a mortgage broker to find a plan that works for you.
Can Equitable Bank sell or foreclose on my home?
What if I already have a mortgage on my property?
Who gets the profit if my home appreciates?
Which provinces does Equitable Bank service with reverse mortgages?
Do you offer reverse mortgages on mobile homes, condos, and apartments?
Can I get out of my reverse mortgage?
Can I make prepayments?
When can I make a prepayment without charge?1
Interest payment – Prepay any of your interest outstanding once per calendar month.
1Subject to certain conditions.
Facts About Reverse Mortgages In Canada On Taxes & Pensions
All money that you receive for a Canadian Reverse Mortgage is tax-free.
Canadian reverse mortgages do NOT affect any Old Age Security or Guaranteed Income Supplement government benefits you may already be receiving.
You make absolutely NO monthly repayments while you or your spouse live in your home. Other mortgage products require you to make a monthly payment. With a Canadian Reverse Mortgage you do not have to make any mortgage payments.
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More About Reverse Mortgages
What details of the Equitable Bank Reverse Mortgage can I compare with other options?
Why reverse mortgage prepayment charges matter
Need retirement funds? Youre not alone.
Where can I get an Equitable Bank Reverse Mortgage?
Although Equitable Bank is a Schedule I Canadian Banklike RBC, TD and Scotiabankits different from its peers in many ways.
One important distinction is that youll never see an Equitable Bank brick-and-mortar branch, as the Banks branding states we would rather build your savings than build bank branches. Instead, Equitable Bank offers its residential lending products through many of the 15,000+ mortgage brokers operating across Canada. If youre interested in learning more about mortgage brokers, check out Mortgage Professionals Canadas website. This industry association represents about 11,500 mortgage broker members and is involved in many important aspects of Canadian residential real estate. Read more
Making sense of reverse mortgage rates
When it comes to any lending product, the mind commonly goes to two places how much will I get and how much will it cost me?
This post will focus on the how much will it cost me part, since interest rates for reverse mortgages are often misunderstood, especially when compared to other lending solutions. Read more.
Could a reverse mortgage work for you?
Why Now Is A Good Time To Consider A Reverse Mortgage
Elena Berd / Shutterstock
Reverse mortgages have become more appealing because of Canadas skyrocketing housing prices. Homeowners, even those who need cash badly, dont want to sell their houses and risk missing out on any future appreciation.
Thats a legitimate concern, given the Canadian housing markets extreme supply-demand imbalance which isnt likely to be remedied anytime soon.
A reverse mortgage allows homeowners to continue benefiting from surging home values. In fact, properties in many Canadian cities are appreciating at levels that dwarf the interest rates attached to most reverse mortgages.
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Reverse Mortgage In Canada Dos
Since this product was created by HomEquity Bank specifically to help Canadian seniors, the process to secure a reverse mortgage is streamlined to quickly and easily provide access to the funds. A reverse mortgage loan can best serve its purpose if you consider certain guidelines before securing a loan and while utilizing the proceeds:
What Happens To A Reverse Mortgage When You Die
Death of the last surviving borrower is a maturity event on a reverse mortgage loan which means the loan becomes due and payable. Your heirs will have 6 months to refinance the loan or up to 12 months by filing an extension to sell. Any remaining equity after the loan is repaid belongs to your heirs. If there is a shortfall in the loan amount to the current appraised value, you may rest assured, reverse mortgages are non-recourse in nature and therefore cannot transfer debt to your heirs or estate.
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Reverse Mortgage Canada All The Facts You Need
Before we get to all the important information regarding a reverse mortgage, I strongly suggest you download the free guide to a reverse mortgage on our sister site.
This is the most jam packed and comprehensive guide to reverse mortgages in Canada out there if you are seriously considering this option, then this is pretty much a must read download it at the link above.
With that said, today in response to several requests from our customers, I am going to dive into everything related to reverse mortgage.
It is very clear to me that very few people understand reverse mortgages and are confused by things they may have read or heard about them .
How To Get A Reverse Mortgage
To get a reverse mortgage, you need to meet a few conditions:
- You must own your home
- The home must be your primary residence
- All owners must be at least 55 years old
During the application process, you must include all individuals listed on the title. Lenders may also ask you to get legal advice regarding a reverse mortgage. Proof of this advice may be required.
The maximum amount youll be able to get depends on the following:
- Your age
- The condition of your home
- The location of your home
- Your lender
If approved, you can choose to take a one-time lump sum, instalments, or a combination of the two. Which option you decide on could affect how much interest youre charged, so youll want to ask your lender about the details.
Only two financial institutions offer a reverse mortgage in Canada. HomeEquity Bank offers their Canadian Home Income Plan Reverse Mortgage, which is available across the country. Theres also Equitable Bank, which does reverse mortgages for homes located in major urban centres.
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Reverse Mortgage Age Requirement
To be eligible for a reverse mortgage, borrowers need to qualify for some reverse mortgage age requirements. Such as:
- The borrower needs to be a legal owner of the property and 55 years old or above.
- Every owner of the mortgaged property needs to be 55 years old or above.
Lenders also tend to ask the borrower to get legal advice before applying for a reverse mortgage. They may ask for proof of this consultation.
The Reverse Mortgage In Canada Defined
Before being able to understand if a reverse mortgage is the best decision for your situation, it is important to understand exactly what is a reverse mortgage and the details of the product that is being offered. At the most basic level, reverse mortgages in Canada are specialized loans against the value of your home, issued by HomEquity Bank as a CHIP Reverse Mortgage. Designed as a means of providing access to the equity that has built up in your home, it is considered reverse because you do not make payments on the loan the loan provides payment to you. No payments are due as long as you own your home. More details will be included in the following segments so you will understand exactly what this means for you and your retirement.
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Home Equity Loan Or Home Equity Line Of Credit
A home equity loan is a second mortgage thats secured by the borrowers home equity and paid out in a lump sum. Similarly, a home equity line of creditor HELOClets homeowners borrow against their equity up to a certain limit and access those funds on an as-needed basis. This means you only pay interest on your current balance, not a lump sum loan.
In contrast to a reverse mortgage, you will have to make monthly payments, and lenders will evaluate your income and credit when reviewing your application.