Reverse mortgage interest rates are actually fair when you consider how much risk the banks take on when offering reverse mortgages. Normal mortgages tend to favour the banks (the lenders). This is because of those mortgages’ contractual terms.
On the other hand, reverse mortgages offer the borrowers (the homeowners) much more security.
So what are today’s reverse mortgage rates in Canada? You can find them by clicking here. To simplify, it’s safe to say that reverse mortgage interest rates (fixed rates) are roughly 2.5% higher than normal, conventional fixed mortgage rates. With variable reverse mortgage interest rates, the rates are 1.69 – 1.99% above most banks’ prime lending rates.
Reverse mortgages would likely not exist in Canada if their interest rates were lower. Why is that? It’s because the lenders need a premium for all the extra lending risks they’re taking on.
Think about it. With most mortgages, the lender can ask for its money back if the terms of the contract are broken. In fact, the lender can ask for its money even if the terms of the contract become unfavourable. Conventional (regular) mortgages have all kinds of terms in the contracts that allow the lender this kind of protection.
But reverse mortgages are much simpler – they are not “callable” loans. This means the lender can’t simply “call in” the mortgage (ask for the money back) when, say, house prices go down, or one of the homeowners passes away.
Reverse mortgages also never require the borrowers to re-qualify. At the end of a reverse mortgage’s term (say, 5 years), the borrower’s mortgage is renewed at the prevailing interest rates. Even if that borrower’s home price diminished significantly – that would be the bank’s problem, not the borrower’s.
So just to be clear: the borrowers don’t have to re-qualify, and don’t have to pay anything at the end of the mortgage term. (The terms are: 6-month, 1-year, 2-year, 3-year, or 5-year). So what happens? The bank simply contacts the borrowers, lets them know about the current interest rates, and the mortgage continues as before.
Keep in mind that the banks do charge a “setup fee” to arrange a reverse mortgage. This fee goes 100% to the bank. (Lotus Income receives nothing directly from the borrower – the banks pay Lotus Income its fees.) The fees range from $995 to $1795. It’s not charged again at renewal.
Homeowners who want a reverse mortgage have the option of a fixed rate, or a variable rate. As a reverse mortgage borrower, you can switch to one or the other during the mortgage term itself, or at the end of the term. That’s up to you. Just keep in mind that if the borrower has a fixed rate at first, but then wants to change over to a variable rate (or another rate) during the current term, then an interest rate differential might be applicable. If the borrower has a variable rate, then he or she can switch to a fixed rate at any time.
Paying the reverse mortgage back is straightforward. The Reverse Mortgage only becomes due when the borrowers move, sell their home, or pass away. As long as the borrowers live in the home mortgaged, and maintain it as their principal residence, then the bank won’t require payments.
When the reverse mortgage becomes due, triggered by one of the three events above, then the total amount of the mortgage (plus interest) is paid back. In (by far) most cases (99% of the time), the mortgage and the interest are covered by the equity in the home. In other words, the sale of the home covers the cost of the reverse mortgage and even leaves money left over.