Clay Jarvis
Beth Buczynski
A reverse mortgage is an increasingly popular way for Canadians aged 55 and older to access the equity they’ve accrued in their homes.
Reverse mortgages can provide financial flexibility and peace of mind, particularly for retired homeowners living on fixed incomes. But there’s a lot to consider before reaching out to a reverse mortgage lender and starting the application process.
What is a reverse mortgage?
A reverse mortgage is a loan that exchanges home equity for cash.
Using a reverse mortgage, a homeowner borrows money based on the amount of equity they currently have and pays that amount back once the home is eventually sold. It’s called a “reverse” mortgage because it eats into your equity rather than increasing it.
When an older or retired homeowner needs of cash, options can be somewhat limited, especially if they aren’t interested in selling their home or they rely on their other investments for long-term income. Pulling out equity through a refinance may not be feasible if a person’s retirement income can’t support a new round of mortgage payments.
In these cases, a reverse mortgage can provide the necessary cash while allowing the homeowner to retain possession of an appreciating piece of real estate.
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Who offers reverse mortgages in Canada?
Canada’s two main providers of reverse mortgages are HomeEquity Bank, which began offering reverse mortgages in 1986, and Equitable Bank, which was founded in 1970. While both are Schedule 1 banks, neither have physical branches you can visit.
HomeEquity Bank’s reverse mortgage products are available from the company directly and through all of Canada’s major banks, as well as some credit unions, mortgage brokers and financial planners. Equitable Bank’s reverse mortgage products are available through independent mortgage brokers who provide reverse mortgage services.
HomeEquity Bank offers reverse mortgages in all Canadian provinces but not any of the three territories. Equitable Bank only lends on homes located in certain areas of British Columbia, Alberta, Ontario and Quebec.
Types of reverse mortgages
As with typical mortgages, reverse mortgages come in different types. When considering a reverse mortgage product, you’ll have to choose between an open or closed mortgage agreement and decide whether whether you’d prefer a variable or fixed mortgage rate.
Reverse mortgage types also differ in how they allow you to receive your money. Some products let you access your entire mortgage amount upfront; others combine an initial lump-sum payment with smaller withdrawals that can either be scheduled or made at your discretion.
What is the CHIP Reverse Mortgage?
The CHIP Reverse Mortgage is Canada’s oldest and most widely-used reverse mortgage. It was HomeEquity Bank’s first reverse mortgage product, known in its early days as the Canadian Home Income Plan. It was rebranded as the CHIP Reverse Mortgage in 2014 and is now one of several different reverse mortgage options available from the company.
How does a reverse mortgage work in Canada?
Reverse mortgages are generally pretty simple. But it’s important to understand their eligibility requirements, interest rates and how the money is both doled out and paid back.
Reverse mortgage eligibility
Even though reverse mortgage products have their own unique guidelines, the eligibility requirements tend to be fairly common. To be eligible, you must:
- Be at least 55 years old. Anyone else on the home’s title must also be 55 or older.
- Own the home you expect to borrow against, and live in it as your principal residence.
- Own a home that’s worth at least $200,000 (HomeEquity Bank may require a minimum value of $250,000).
Applying for a reverse mortgage
Getting a reverse mortgage generally begins by completing an estimate on a lender’s website. Doing so will give you a general idea of how much you’ll be able to borrow.
When evaluating your application and determining the maximum amount to lend you,, a lender will look less closely at your credit score and focus more on:
- Your age.
- The location and condition of your home.
- Your home’s appraised value.
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 having received this advice may be required.
Reverse mortgage interest rates and fees in Canada
One of the primary drawbacks of reverse mortgages is that they charge relatively high interest rates that will be in effect for as long as a loan is active. Because reverse mortgages don’t have a typical amortization schedule, interest can accrue indefinitely and eat up more of your home equity.
As of January 31, 2024, the rates available on the HomeEquity Bank CHIP Reverse Mortgage ranged from a fixed rate of 7.59% (7.92% APR) to a variable rate of 10.13% (10.56% APR). Both rates are for five-year terms.
As of January 31, 2024, Equitable Bank’s reverse mortgage rates ranged from 6.74% (6.782% APR) on a five-year fixed-rate loan to 8.49% (10.074% APR) on a six-month fixed-rate loan.
Both companies also charge fees. Equitable Bank’s set-up fee is $995, and that’s in addition to any legal or home appraisal charges you may incur during the application process. HomeEquity Bank’s closing and administrative costs are advertised as $1,795 for its CHIP products, but may differ based on your circumstances.
Both lenders also charge their clients for paying off their reverse mortgages early:
- Equitable Bank charges up to five months’ interest if you pay off your loan in years one, two or three. From years four to 10, the prepayment charge is three months’ interest. You can prepay the entire balance owing with no charge beginning in year 6 if the bank is given three months’ written notice. There’s no charge starting in year 11.
- HomeEquity Bank’s prepayment guidelines are more complex, and vary depending on the kind contract you sign. You’re typically allowed to pay 10% of your loan amount each year without being penalized. After the fifth anniversary, you can repay the loan without penalty so long as you provide three months’ written notice.
How do you receive your reverse mortgage funds?
If you get approved for a reverse mortgage, you’ll have access to as much as 55% of the value of your home equity. You can choose to receive your money in two ways: either as a single lump-sum or as a combination of an initial advance and smaller payments spread out over time. Deciding which method is best for you depends on your financial needs.
If you need to pay for a major expense like a home renovation or family vacation, or want to consolidate debt, it probably makes sense to opt for the initial advance and then schedule smaller, recurring payments over the next several years.
Receiving the entire loan at once can be risky, especially if you qualify for the maximum amount. Spending your reverse mortgage funds faster than anticipated can leave you in a desperate position if there are no other options available for freeing up cash.
Paying back a reverse mortgage
One of the most attractive aspects of a reverse mortgage is the repayment flexibility. You aren’t required to make any scheduled principal or interest payments. In fact, you shouldn’t have to make any payments at all until you sell or move out of your home, or the last borrower dies and their estate sells the home.
Just remember that interest will accrue the entire time you have an unpaid balance on your reverse mortgage. Making regular payments, even if they’re small, can help keep your interest costs in check.
You may be required to pay your loan back in full if your lender considers you to be in default. With reverse mortgages, default can refer to multiple scenarios, including:
- Lying on your loan application.
- Using the funds from your reverse mortgage for illegal activity.
- Letting your home fall into disrepair.
- Not following the conditions outlined in your contract.
Can you owe more than your home is worth?
Both Equitable Bank and HomeEquity Bank have “no negative equity” policies stating that borrowers will never owe more than their homes are worth, so long as they adhere to their mortgage contracts. In HomeEquity Bank’s case, they offer to pay the difference if your home depreciates to the point where it’s worth less than your reverse mortgage balance.
With Canada’s housing market as competitive as it is, it’s unlikely that your home would lose significant, long-term value. But if it does, neither you nor your descendants will be indebted to your reverse mortgage lender after you sell your home.
Can you refinance a reverse mortgage?
At first glance, refinancing a reverse mortgage might not make a lot of sense. If you don’t have to make monthly payments anyway, why would you go through the hassle of refinancing?
But if your home has appreciated significantly and you’re in need of more cash, your lender may allow you to refinance and set new mortgage terms.
Refinancing a reverse mortgage can be risky. You’ll be older when you refinance, and age is a factor in determining how much equity you’re allowed to take out. If you break a reverse mortgage contract in order to refinance, you’ll likely be hit with prepayment penalties.
Is a reverse mortgage a good idea?
A reverse mortgage can be a life-changing decision — for better or for worse. If your cash flow has dried up and you have no other way to cover the cost of either major, one-time expenses or minor, daily expenses, a reverse mortgage is an effective way to fill those gaps, possibly for years.
But sacrificing home equity today means it won’t be there in the future. Let’s say you eventually have to sell your home to pay for residency in an assisted living facility. Paying back a reverse mortgage could knock a massive hole in the proceeds, and leave you with limited options when trying to secure long-term care.
Most scenarios won’t be that dramatic, but those are the kinds of risks associated with reverse mortgages. Once that equity’s gone, it’s gone for good.
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Questions to ask before applying for a reverse mortgage
Even if you think they might be small or insignificant, don’t hesitate to ask your mortgage broker any questions you might have about reverse mortgages. Before cashing in your equity, you’ll want to have 100% clarity on what your decision could mean.
Here are a few questions you’ll likely want answered:
- How will taking out a reverse mortgage limit my other financing options?
- What happens to my home and reverse mortgage if I die?
- Should I access all my loan funds at once or a little at a time?
- What happens if I’m not able to pay my property taxes or insurance or maintain my home?
- Is a reverse mortgage my best option?
Alternatives to a reverse mortgage
If the costs and risks associated with a reverse mortgage aren’t for you, there may be other ways of accessing cash. Unfortunately, some of them involve making sacrifices you might not be comfortable with.
Sell your home and downsize
By selling your house, you’ll have access to all of your equity — without having to pay any reverse mortgage fees or interest charges. And if you use the proceeds of the sale to buy a newer, smaller home, you’ll have cash left over and an appreciating piece of real estate.
The downsides of downsizing are real, though. The home you’ve grown attached to will no longer be yours, and re-entering the housing market might be the kind of stressful, frustrating experience you were happy to leave behind decades ago.
Sell some of your other investments
If you have a robust portfolio that you can afford to partially liquidate, selling off some of the assets it contains could provide the cash you need.
There are several implications you’ll want to talk through with your financial planner before taking this step, including the potential taxes you might pay and how selling certain investments might impact your long-term financial stability.
Take on a tenant
One way of making extra income is to take advantage of Canada’s tight rental market and make an extra room or basement suite available as a short- or long-term rental. In addition to the cash you’ll generate, you might also find a tenant who’s willing to help maintain your property.
There are plenty of risks involved with becoming a landlord, even if you’re just providing a room for travellers a few nights a month. But if you’re confident in your ability to screen and deal with tenants, and are comfortable with people occupying space in your home, renting out unused space is a strategy worth looking into.
Apply for a HELOC
A home equity line of credit (HELOC) is another way of turning home equity into cash. But a HELOC is really only an option if you’re earning a steady income.
Before getting approved for a HELOC, a lender needs to evaluate your finances. If they aren’t confident that you’ll be able to repay your HELOC withdrawals, you could be denied. And if you do get approved but fail to repay your lender, they can take your house.
Apply for a home equity loan
A home equity loan can also provide an infusion of cash. Like HELOCs, getting approved for a home equity loan requires you to still be earning income.
In general, home equity loans can be easier to qualify for than reverse mortgages, but if you’re approved, you’ll be put on a strict repayment schedule. Failing to adhere to it could result in you forfeiting your home.
Advantages and disadvantages of a reverse mortgage
Advantages:
- Additional income. The equity you release will help increase your cash flow.
- No regular repayments. Although you are charged interest on the loan, there’s no need to make monthly payments.
- Age in place. You get to unlock the equity in your home without having to sell or move.
- “No negative equity” guarantee. You can never owe more than what the property is worth.
- Undisrupted income. The cash generated by a reverse mortgage does not affect your Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
Disadvantages:
- Higher interest rates. The rate you’ll pay is typically higher than a HELOC or traditional mortgage.
- Reduced equity. As you borrow more and interest charges accumulate, you’ll lose more of your home’s equity.
- Initial costs. You may need to pay administration, appraisal and legal fees.
- Prepayment penalties. If you choose to sell your home before the end of your term, you will be charged prepayment fees.
Avoiding reverse mortgage scams
One of the darker aspects of the reverse mortgage industry is the possibility of encountering scammers looking to take advantage of older Canadians. You can keep your home and your finances safe by:
- Seeking out a reverse mortgage on your own terms, not on the suggestion of someone who might benefit from you applying for one.
- Interviewing several licensed, experienced mortgage brokers before deciding on who to work with.
- Ensuring your broker arranges your reverse mortgage through a known entity like HomeEquity Bank or Equitable Bank.
- Learning all you can about reverse mortgages so you can identify when you’re being asked for unnecessary personal information or charged unnecessary fees.
- Asking for every term, condition and fee to be put in writing.
Frequently asked questions about reverse mortgages in Canada
Reverse mortgages charge higher than usual interest rates, require borrowers to pay multiple fees and carry the risk of prepayment penalties. Reverse mortgages also reduce homeowners’ equity, leaving them with less cash to work with when they eventually sell their homes.
The interest rates on reverse mortgages can be very high — over 10% in some cases. Typically, the longer your term, the lower the rate, but even the lowest reverse mortgage rates are usually over 6%.
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