Everything You Need to Know About Reverse Mortgages

Now more than ever, as homeowners age, they are tapping into their home equity in exchange for cash. It is a process known as a reverse mortgage. Over the years, this type of mortgage loan has grown in popularity among seniors. 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. Many have a lot of equity in their home. If they’re over 55 years old and potentially mortgage free, it would let them free up some of that equity. For example, they could gift some to a child or grandchild. Something else a reverse mortgage would do is pay them money each month which they could use to enjoy life.

If you’re considering converting to a reverse mortgage, you would likely have a lot of questions. You might want to know the eligibility requirements or how to receive payments. Here are some of the things 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. It allows you to convert money from the property’s equity tax-free while still maintaining ownership. Unlike a traditional mortgage which requires monthly payments, the reverse mortgage doesn’t need to be repaid 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.

A home equity line of credit (HELOC) is another popular form of accessing value in your home. It offers 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, 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, it would be a good idea for people to speak with a mortgage professional. He or she would be able to explain the loan in greater detail.

Getting Started

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, its type and condition, your eligibility criteria, and where you live.

Unlike regular mortgage applications, which take a deep dive into your credit history and income, reverse mortgage assessments are generally less labourious. Every document is not scrutinized. The qualification is to make sure you have reasonable credit and 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. 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.

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. Still others may opt for some of the money up front and some monthly. Whatever you choose to use the money for is up to you.

This Isn’t Working Out

A reverse mortgage isn’t a forever commitment. If it turns out it just isn’t right for you or you need to break the agreement, it is possible to get out of it. However, there will be a few conditions. As with any mortgage contract, there are penalties for breaking it in the middle of a term. The extent of the penalty varies widely. It is dependent on how long you’ve participated in the mortgage and the reason why you’re breaking it.

If you are three months into it or 10 years into it will have an effect. As well, the reason you’re breaking it could make a difference. Are you moving into a nursing home? Are you moving to another area?

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. Like all mortgage products, it is crucial to understand what you are getting into before signing on the dotted line. It may not be for everyone, but may suit your circumstances perfectly. Regardless, you want to have all the information before going ahead.

Get in touch if you have questions!