What’s a reverse mortgage?
As home owners age and live longer, their income sources may no longer be enough to cover expenses, especially for those on fixed incomes.
Many home owners in this phase of life look to the market value their homes have built since they purchased it, also known as equity, to help cover these expenses.
But how can they access their home’s equity without selling it?
One option is a reverse mortgage.
Reverse mortgage defined
A reverse mortgage is loan that allows home owners aged 55 or older to borrow up to 55 per cent of the value of their home without having to sell.
The amount available to borrow depends on the:
- age of home owner
- appraised value of the home
Access to money
55% of your home’s appraised value, minus the balance of your mortgage
Fixed or variable, generally higher than a mortgage
Either a lump sum deposited to your bank account or in instalments
How does it work?
After qualifying for a reverse mortgage, you have the choice to receive the cash in a lump sum or regular payments. There are no limits on how you spend the money. It can be used for everyday expenses, health care costs, or debt repayment.
Like any loan, it eventually needs to be repaid along with interest. You can choose when to make the payments, but the longer it takes to pay back, the more expensive it’ll be.
You or your estate must pay back the balance on the loan when:
- you sell your home
- you move out of your home
- the last borrower dies
- you default on the loan
If you pass away before the loan is repaid, your estate must pay the balance owing. If more than one person owns the home, the loan must be repaid when the last owner passes or sells the home.
How much does a reverse mortgage cost?
Costs can vary and may include:
- a higher interest rate than a regular mortgage
- a home appraisal fee
- a setup fee
- a prepayment penalty
- legal advice
Where can I get a reverse mortgage?
In Canada, there are two places that offer reverse mortgages. HomeEquity Bank has its Canadian Home Income Plan from which you can get a reverse mortgage directly or through mortgage brokers.
The second is Equitable Bank which offers reverse mortgages in major urban areas in BC and three other provinces.
Pros and cons of a reverse mortgage
What questions do I ask a lender about a reverse mortgage?
- How can I get money from a reverse mortgage?
- Are there any fees I have to pay?
- What’s the interest rate?
- What can cause me to default on the loan?
- Are there any penalties if I sell your home within a certain period of time?
- How much time do I have to pay off the loan’s balance if I move?
- How much time does my estate have to pay off the loan’s balance if I pass away?
- What happens if it takes my estate longer than the stated period to fully repay the loan?
- What happens if the amount of the loan ends up being higher than my home’s value when it's time to pay the loan back?
Source: Government of Canada