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Reverse Mortgage

Reverse Mortgage

Would you like to know what is a Reverse Mortgage and how does it work? In Canada, you can borrow up to 55% against your home value if you’re 62 and older.

Reverse Mortgage lets you borrow against the value of your home. It’s for homeowners aged 62 and older to access 55% of the current value of their home.

A reverse mortgage allows Canadian homeowners aged 55 and over to access their home equity and convert it into tax-free cash. Unlike a typical mortgage, you won’t have to pay any principal or interest on a reverse mortgage until you and your spouse both leave the house.

Taking out a reverse mortgage means being able to spend the remainder of your life comfortably. If you’re interested in getting a reverse mortgage in Canada, here’s everything you need to know.

What is Reverse Mortgage in Canada?

If you’re like the majority of Canadian homeowners aged 55 and above, most of what you possess falls into one of two categories:

  1. Home equity
  2. Extra income

Extra or leftover income isn’t enough to cover the costs of a peaceful retired life. Your home equity, on the other hand, is. Usually, Canadians refuse to use their home equity due to the risk of losing the property to foreclosure.

However, a reverse mortgage ensures senior homeowners do not have to face this risk. With a reverse mortgage, homeowners can convert a large portion of their home equity into non-taxable money. This can then be used to fund any and all expenses.

How Does a Reverse Mortgage Work in Canada? 

How does a reverse mortgage work in Canada? Well, it’s quite simple.

Because the purpose of a reverse mortgage is to free up equity in your house, any liabilities secured by it, such as a mortgage or a home equity line of credit, must be paid off first. After that, you’ll get a tax-free bulk payment or regular installments that you can use for various costs.

How Does Reverse Mortgage Work

Reverse mortgage payments can be used to augment or completely replace other sources of income. A reverse mortgage can be especially beneficial for elderly homeowners who have a lot of equity in their property but little income, such as a pension or retirement assets.

Reverse mortgage borrowers retain their homeownership without paying monthly mortgage payments until they move, sell, or pass away.

How Much Can You Borrow with a Reverse Mortgage?

The amount a potential borrower can borrow is linked to the requirements for reverse mortgage. The loan amount for a reverse mortgage is determined by these factors:

  • The age of the borrower and any other owners of the property
  • The location of the property
  • The type of property
  • The condition of the property
  • The property’s appraised value

Homeowners can access up to 55% of the current value of their primary residence with a reverse mortgage.

That implies that if you’ve paid off your house’s original $500,000 mortgage and it’s now worth $800,000, you might get a reverse mortgage for as much as $440,000 – 55 percent of $800,000.

The Requirements and Eligibility Criteria for a Reverse Mortgage

A reverse mortgage lender evaluates many variables during the application process. The following are some basic requirements for a reverse mortgage:

  • Every owner of the mortgaged property needs to meet the minimum age requirement.
  • The mortgaged property should be the borrower’s primary residence or the borrower should reside there for a minimum of six months every year.
  • The amount of equity should meet the lender’s requirements.
  • The property should be in a good state. Properties are more likely to qualify for larger loan amounts if they are well kept.
  • The property’s appraised value should meet the lender’s requirements.

Reverse Mortgage Equity Requirements 

Home equity is calculated by subtracting the appraised value of your home from any outstanding secured loans against it. Some reverse mortgage equity requirements are:

  • Any outstanding secured debt on the home must be larger than or equal to the total amount you can borrow.
  • Your home must be worth at least $200,000 to qualify for a reverse mortgage.

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.

What are the Benefits of a Reverse Mortgage?

When you take out a reverse mortgage, you will have less equity in your home, which can be a bitter pill to chew for homeowners. However, there are numerous benefits to this initiative:

  • You keep a valuable, developing asset in your possession.
  • You escape the inconvenience of having to relocate and change neighborhoods.
  • For an elderly homeowner, a reverse mortgage may be easier to get than a line of credit or a refinance loan.
  • You can greatly improve your cash flow.

That last point is very important. 

A reverse mortgage gives you income that you wouldn’t otherwise have, and you can spend it as you choose. Maybe you need funds for something as simple as a family vacation or a much-needed new roof for your home. With a reverse mortgage, you can access these funds without making drastic lifestyle changes.

While reverse mortgage programs might have a few disadvantages, the benefits outweigh them.

Pros and Cons of a Reverse Mortgage

Before you decide to get this mortgage, make sure you consider the pros and cons of a reverse mortgage carefully.

Pros

There are several benefits and advantages associated with a reverse mortgage, the most significant ones being:

  • You are not required to make any payments on your loan regularly.
  • You can convert some of your home’s value into cash without having to sell it.
  • This money has no impact on your Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
  • Your house is still yours.
  • You are not required to pay taxes on the money you borrow.
  • You may be able to choose when and how you get the funds.

Cons

Senior homeowners are hesitant to get this loan due to the problems with a reverse mortgage. The most notable cons and disadvantages of reverse mortgage are:

  • Most other types of mortgages have lower interest rates.
  • As interest on your loan accumulates, the value of your home may decrease.
  • When you die, your heirs are responsible for repaying the loan plus interest within a certain time frame.
  • The time it takes to settle an asset may be longer than the time allotted to repay a reverse mortgage.
  • Your property may have less money to leave to your children or other dependents.
  • The costs of a reverse mortgage may be higher than those of a traditional mortgage or other credit products.

Reverse Mortgage Costs

The costs associated with a reverse mortgage tend to vary depending on various factors. Such as:

  • The lender
  • The loan program
  • The balance of the loan
  • Any external loan requirements

Some reverse mortgage costs are:

  • A higher rate of interest than a typical mortgage
  • A fee for a home appraisal
  • A one-time setup fee
  • If you pay off your reverse mortgage before it’s due, you’ll be charged a prepayment penalty.
  • Legal fees for closing costs or legal assistance from a third party

Some fees may be charged to your loan balance. Others may require an upfront payment.

The Reverse Mortgage Interest Rate in Canada

The interest rate on reverse mortgage in Canada as of December 2021 is considerably higher than current mortgage interest rates in Canada.

The current reverse mortgage interest rate by Equitable Bank ranges from 3.50 to 4.40 percent. Their lowest and highest reverse mortgage interest rates are:

  • 3.49% for a 1-year fixed-rate mortgage
  • 4.39% for 5-year fixed and adjustable rates

CHIP reverse mortgage rates are even higher, ranging from 3.90 to 4.60 percent. Their current lowest and highest reverse mortgage interest rates are:

  • 3.89% for a 1-year term
  • 4.59% for a 5-year term, before closing and administrative costs.

Equitable Bank tries to save expenses by allowing funds to be drawn in advance, which allows them to provide lower rates. Despite this, CHIP reverse mortgages constitute more than 99 percent of the reverse mortgage market, with Equitable Bank accounting for less than 1%.

Reverse Mortgage Lenders in Canada

In Canada, there are currently only two reverse mortgage lenders. CHIP reverse mortgage by HomeEquity Bank and Equitable Bank’s reverse mortgage program. In 2018, Equitable Bank entered the reverse mortgage market to compete with CHIP reverse mortgages, which were previously the only lenders for reverse mortgages.

CHIP Reverse Mortgage

The CHIP reverse mortgage from Home Equity Bank is the most popular choice in Canada. The reverse mortgage industry in Canada reached $4 billion by 2020, with CHIP reverse mortgages accounting for $820 million in new originations in 2019. On the other hand, Equitable Bank only has $20 million in reverse mortgages.

To be eligible for a CHIP reverse mortgage, some requirements and terms a homeowner should meet are:

  • You must be 55 or older.
  • Your partner must be 55 years old or older as well.
  • The value of your home must be at least $150,000.
  • You can borrow up to 55% of the market value of your property.
  • Home Equity ensures that the amount you must repay will not exceed the market value of your home when it is sold.
  • Although the reverse mortgage can be paid off in full early, fees may apply.
  • Payments can be made in one lump sum or in monthly instalments.

Equitable Bank Reverse Mortgage

Equitable Bank began providing reverse mortgages in 2018. To qualify for their reverse mortgage, the requirements and terms are as follows:

  • The reverse mortgage is only for properties in major urban centers in British Columbia, Alberta, Ontario, and Quebec.
  • Only homes with a value of at least $250,000 can qualify.
  • You must also be 55 years old or older and live in your home for more than 6 months per year as your primary residence.
  • The minimum amount you can borrow is $25,000.
  • Equitable Bank offers a no negative equity guarantee, where you will never owe more than the market value of your home when it is sold.
  • Borrowers can choose from various fixed terms, ranging from 6 months to up to 5 years.
  • If you choose a fixed interest rate, you cannot schedule payments. Payments will be requested as single advances, with the minimum amount of each payment being $5,000. These payments can be requested at any time.
  • Payments can be scheduled for up to 20 years if your interest rate is adjustable.
  • Minimum payments depend on the frequency of your scheduled payments, with each payment accruing interest at the current adjustable interest rate at the time of each payment.
  • Under both the fixed and adjustable interest rate products, there is an initial minimum payment of $25,000.
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