Now more than ever, Canada’s experienced homeowners are tapping into their home equity in exchange for cash, a process known as a reverse mortgage.
Over the years, this type of mortgage loan has grown in popularity among seniors. In fact, in January 2020, reverse mortgage debt reached a new record of $4.03 billion, according to data from the Office of the Superintendent of Financial Institutions (OSFI). The choice to leverage equity instead of leaving it tied up in their property is an attractive option to an increasing number of mature homeowners.
A lot of seniors have a lot of equity in their home,” says Elan Weintraub, director and mortgage broker at Mortgage Outlet Inc. “If they’re 55-, 65-, 75-years old and they’re potentially mortgage free, it would let them, if they want to, give their kids or their grandkids a gift, say $50,000, or a reverse mortgage would pay them $1,000 a month which they could use to enjoy their life.”
If you’re considering converting to a reverse mortgage, you likely have a lot of questions, from eligibility requirements to receiving payments. Here, Weintraub shares what you need to know about reverse mortgages.
Reverse mortgages 101
In simple terms, a reverse mortgage is a loan connected to the value of your home that allows you to convert money from the property’s equity tax-free while still maintaining ownership. Unlike a traditional mortgage which requires monthly payments, you don’t need to repay the reverse mortgage loan until you decide to move and sell, or the last borrower passes away.
In order to be eligible for a reverse mortgage, you need to be a Canadian homeowner and at least 55 years old. Your spouse must also be 55 years old if they’re on the title of the home.
“The qualifying age is so high because it’s a product, [a] mortgage option, created specifically for seniors that is based on actuarial probability of how long someone will live in their house,” says Weintraub.
A home equity line of credit (HELOC) is another popular form of accessing value in your home, offering between 65% to 80% of the property’s appraised value in some cases. A HELOC is accessible to any homeowner without added age restrictions, but does require proof of a sufficient income and good credit. You’ll also be required to do a stress test to prove you can make payments under higher qualifying interest rates. For senior homeowners who would prefer simpler eligibility criteria, a reverse mortgage might be the best fit.
There are some misconceptions about reverse mortgages, Weintraub notes, particularly around eating into the equity of your home or the bank taking over your ownership. While more homeowners are beginning to understand reverse mortgages more clearly, Weintraub recommends clients speak with a mortgage professional who can really explain the loan in greater detail.
When you’re ready to commit to a reverse mortgage, there will be an initial assessment to determine the home’s value and how much money you could be entitled to.
You can expect to be evaluated on the appraised value of the property, plus its type and condition, your eligibility criteria and where you live. Contrary to regular mortgage applications, which take a deep-dive into your credit history and income, Weintrab explains that reverse mortgage assessments are generally less labourious.
“They’re not scrutinizing every single document,” he says. “It’s just to make sure you have reasonable credit and at least some form of income to pay the property taxes.”
The two biggest financial institutions that offer reverse mortgage plans in Canada are HomeEquity Bank and Equitable Bank, though your own banking organization may offer options too. Whichever lender you go with, you should anticipate some setup costs, including legal fees for closing or legal advice, appraisal costs and setup charges.
You’ll still need to pay interest on the reverse mortgage loan, which tends to be higher than regular mortgages. However, you can choose to pay the interest on a monthly or yearly basis, or in full with the principal at any time.
Cash in hand
If you’re wondering how much you can borrow from a reverse mortgage, it’s like asking how long a piece of string is — it varies. All of the criteria used in your mortgage assessment
will determine how much cash you can expect to receive, including which mortgage lender you go with. For instance, a reverse mortgage with HomeEquity Bank’s Canadian Home Income Plan (CHIP) could let you borrow up to 55% of the home’s value, while Equitable Bank might let you take up to 40%.
When it comes to receiving your money, you might have some flexibility. Some homeowners choose to receive monthly payments, while others opt to take out a lump sum.
“You could just take a cheque for $500,000 in that example, or [you] could say, ‘You know what? I just want $2,000 a month.’,” explains Weintraub. “You could also take a hybrid. You could take $200,000 up front and $2,000 a month.”
Whatever you choose to use the money for is up to you. Weintraub says some clients decide to give their money to their children to cover tuition costs or wedding expenses, while others use it in everyday spending.
This isn’t working out
A reverse mortgage isn’t a forever-commitment. If a reverse mortgage isn’t right for you or you need to break the agreement, it is possible to get out of it, just with a few conditions.
As with any mortgage contract, Weintraub explains, there are penalties for breaking a reverse mortgage in the middle of a term. How severe the penalty would be varies widely, depending on how long you’ve participated in the mortgage and the reason why you’re breaking it.
“It depends on how far you’re into it,” says Weintraub. “Is it three months into it? Is it 10 years into it? What’s the reason that you’re breaking it? Are you moving into a nursing home? Are you moving to Florida? It really depends on that.”
If you sell your home, you’ll be required to repay the amount left on the loan. This also applies when the last borrower dies, in which case, the estate would need to pay off the reverse mortgage.
Reverse mortgages are letting more seniors reap the benefits of equity in their home but, like all mortgage products, Weintraub says it’s crucial to understand what you’re getting before you sign on the dotted line. For instance, if you have six kids, you should probably buy a minivan, not a Porsche, he explained — it’s not that one option is inherently worse than the other, it’s just situational, and reverse mortgages follow a similar philosophy.