Is a Reverse Mortgage Right For You?

Reverse mortgages are an increasingly popular way for Canadians aged 55 and older to access the equity they’ve accrued in their homes. HomeEquity Bank, the country’s largest reverse mortgage provider, recently reported that it originated $1 billion in new loans in 2022, a 30% increase over 2021.[1] 

The liquidity offered by 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. 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 is in need of cash, their options can be somewhat limited, especially if they aren’t interested in selling their home, or 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.

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. 

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, 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 across Canada. Equitable Bank only lends on homes located in urban areas in British Columbia, Alberta, Ontario and Quebec.

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 is worth at least $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 condition and location 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 March 2, 2023, the rates available on the HomeEquity Bank Chip Reverse Mortgage ranged from a fixed rate of 6.99% (7.30% APR) to a variable rate of 9.40% (9.79% APR). Both rates are for five-year terms.

As of March 2, 2023, Equitable Bank’s reverse mortgage rates ranged from 6.74% (6.779% APR) on a five-year fixed-rate loan to 9.39% (10.788% 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 a homeowner’s 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 Year 1. 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.
• 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 require a fair chunk of change to cover a major expense like a home renovation, family vacation or lingering 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 cash-freeing options available. 

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.

But 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.

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.
• You keep your house. 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.
• Your other income is unaffected. 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.

Is a reverse mortgage a good idea?

A reverse mortgage can be a life-changing decision — for better and 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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