Articles and Blogs

February 8^th 2022 - Philip Roe

Reverse mortgages offer options to those at or nearing retirement who are “cash poor”. Planning is fine and well, but life intervenes from time to time. Even the best of intentions can be derailed by life’s emergencies. But knowing some reverse mortgage facts can help those interested get a better idea about the product.

The most interesting of reverse mortgage facts is that more Canadians than ever are turning to them. The long and short of it is that qualifying Canadians can borrow against the equity that is already in their home.

If you are one of these Canadians considering a reverse mortgage, here are a few reverse mortgage facts that may enlighten you.

Reverse Mortgage Facts: They’re on the Rise

Simply saying that more Canadians than ever are turning to reverse mortgages is a gross generalization. But how about some hard numbers?

According to data from the Office of the Superintendent of Financial Institutions (OSFI), they are no doubt on the rise. OSFI is a federal government agency in charge of supervising and regulating Canadian banks.

Perhaps the biggest of reverse mortgage facts: as of July 2019, there was nearly $4 billion ($3.78 billion) in outstanding reverse mortgage debt. Compared to July of 2018, that is 26.24% more.

The simple fact of the matter is that reverse mortgages are providing another option for Canadian retirees.

Reverse Mortgage Facts: How They Work

First thing’s first: how does a reverse mortgage even work? Before considering a specific financial product, it probably helps to know a little bit about how they work, right?

First and foremost, a reverse mortgage works in the exact opposite way as a traditional mortgage. The latter gives you the funds necessary to buy a house. A reverse mortgage, however, advances you money from the equity already built into your home.

There are some qualifications, though. First, you and anyone else listed on the title needs to be at least 55 years old. Those of qualifying ages are eligible to borrow up to 55% of their home’s current value. This can depend on the type of home, the genders and the ages of the borrowers, and the current appraisal value of the home.

To remain eligible, the borrower has to make the home their primary residence. On top of that, they have to make certain that all property taxes and insurance are up to date. Seems like a lot of qualifications to meet, right?

Well, the biggest of reverse mortgage facts is that you can do whatever you want with the money. Even better, you get to choose how you get the money (lump sum or regular deposits).

The caveat is that interest will accumulate on that loan. While there are no immediate payments due, the sum of the principal and the interest will come due at some point.

Reverse Mortgages: Who Provides Them and How are They Paid Back?

When you receive the funds for a reverse mortgage, you are free to do with it what you want. Put them towards long overdue renovations, pay off debt, go on vacation, etc. Whatever you want to do with the funds, you can do.

Reverse mortgages are also not “callable”. What does that mean? Well, it means that the lender cannot request any payments so long as the conditions are met. Lenders have certain requirements that must be met. If they are not, you would be in default on the loan and may be asked to pay it back.

So long as those conditions are met, there are three other times where the principal must be repaid.  Principal is to be repaid should you sell the home, move out permanently, or should all of the titleholders pass away.

In the latter case, the estate would be responsible for paying back the reverse mortgage. The amount of time that the reverse mortgage must be paid back varies based on the situation. For estates, the general rule of thumb is about 180 days. The downside is that some estates can take longer than that to settle, making repayment an issue.

As of today, there are two reverse mortgage providers in Canada: Equitable Bank and HomeEquity Bank. Currently, their rates are between 5.49% and 5.59% on a five-year fixed term. They have other rates available, so do your research. And if it sounds like those interest rates are much higher than traditional mortgages, that’s because they are.

Reverse Mortgage Facts: How Does a Reverse Mortgage Impact Equity?

There are three different ways to create cash flow using your house: a second mortgage, a home equity line of credit (HELOC), and a reverse mortgage. The big difference is that reverse mortgages don’t require income to qualify and there is no monthly repayment during the term.

In reverse mortgages, the funding comes out of the equity in the home. The interesting thing pertains to the gain or loss of value in the home. So, if the home gains value, it goes to the borrower. But if there are losses in home value, the lender will take on that loss. Basically, it ensures that the homeowner doesn’t owe more than “fair market value” for the home.

Here’s a good explanation of how a reverse mortgage impacts equity. Let’s say that the borrower has a home worth $600,000 and takes out a reverse mortgage at five-year rates of 5.59% on $150,000. The balance is to be repaid after 15 years.

General house appreciation is somewhere around 2%. Based on the remaining $450,000 in equity, the homeowner will be left with $451,826 in equity when that 15 years is up. But appreciation rates can be higher. There is the potential to grow the equity in your home while still getting cash necessary for whatever you need it for.

Reverse Mortgages: Who Do I Talk To?

The first thing that you should do if you want to discuss a reverse mortgage is call Lotus Income. We are here to get you the most equity out of your home and put the most money into your pockets.

Reverse mortgages can seem like a complicated endeavor, so it is important to discuss all of your options first. We can run through the pros and cons of reverse mortgages and determine if it is the right fit for your needs.