Frequently Asked Questions about Reverse Mortgages in Canada
Reverse mortgages came to Canada in 1986, but they have been around in the USA since 1961, when a loan officer in Maine realized a way to help a widow stay in her home after the loss of her husband's income.
In the USA, reverse mortgages have changed a lot since the 1960s.
But in Canada, reverse mortgages are still very conservative, and designed to protect both the homeowner and the equity in the home.
Only Canada's most highly-regulated banks provide reverse mortgages. These banks are commonly known as "Schedule 1 Banks," the same bank category as RBC, Bank of Montreal, CIBC, TD, Scotiabank, and National Bank of Canada.
A reverse mortgage in Canada is one of the safest mortgage types available.
Proceeds are tax-free with no impact on working or pension income. A reverse mortgage in Canada has a maximum loan amount of 55% of the value of the property. This is a conservative approach that ensures borrowers will have equity remaining in their property when they pay off the reverse mortgage.
Read on to learn how reverse mortgages can help you live a better life.
Myths and Facts about Reverse Mortgages in Canada
What is a reverse mortgage in Canada?
Just like a conventional / traditional mortgage, a reverse mortgage is a loan, secured by your home, that allows you to access the equity in your home and convert it into tax-free cash. You have no monthly payments to make and you defer paying back the loan until the time when you no longer occupy the home.
Won't the bank own the home?
The bank will NOT own the home. You retain full title and ownership of the home. The homeowner has the freedom to decide when (and if) he or she would like to move or sell the home.
How come some homeowners end up with MORE equity after a reverse mortgage?
That's because the value of their homes increased enough to offset the costs of the reverse mortgage. Rising home values across Canada can offset much (or even all) of the reverse mortgage principal loan amount and interest. This has not been uncommon in many big cities, especially in Ontario and British Columbia, where rising home values have outperformed many other investment types.
Aren't the interest rates for reverse mortgages high?
Unlike a conventional mortgage, qualifying for a reverse mortgage is based strictly on the homeowner's Age and Property Value. Monthly mortgage payments of principal and interest are not mandatory with a reverse mortgage. These unique features of reverse mortgages are reflected in their interest rates which are modestly higher than the interest rates for conventional bank mortgages, and still much lower than the interest rates of private mortgages. Also, unlike conventional mortgages, reverse mortgages have practically no income or credit requirements. Keep in mind as well that reverse mortgages, unlike conventional mortgages, are not demand loans (they are not callable loans), which means the lenders can NEVER demand payment, cancel the loan, or force you to re-qualify as long as you live in the home, keep the property taxes and insurance up to date, and maintain the home in proper condition.
Will I ever be forced out of my home because of a reverse mortgage?
As long as you maintain your property taxes and property insurance, you will NEVER be asked to leave your home because of a reverse mortgage. You will remain the owner of your home. You will never owe more than your home is worth. Reverse mortgages are designed to safely provide tax-free income to Canadian homeowners aged 55 and older. All you are required to do is keep your property taxes current and maintain home insurance and keep your property well-maintained.
What happens if my home decreases in value?
This won't affect the reverse mortgage, not in Canada. With a reverse mortgage, this risk becomes the bank's problem, and as long as (1) the property taxes and insurance are in good standing, (2) the property remains in good condition, and (3) the homeowner lives in the home, then the loan won’t be called under any circumstances, even if the home decreases in value. The homeowners have peace of mind and can remain in their homes as long as they wish.
Does the homeowner have to make payments?
No. There are no required monthly payments with a reverse mortgage in Canada. As long as the homeowner lives in the home, no payments are needed. The mortgage is only required to be paid back when you choose to move, or sell your home. You always have the option (not requirement by any means) to make advance interest payments in case you wish to reduce the amount owing at the end of the reverse mortgage.
How does a reverse mortgage work?
Your home holds a certain amount of equity, a cash value. A reverse mortgage lends the homeowner money in exchange for a lien on a portion (up to 55%) of the home's equity. You receive cash from the bank either in lump-sum amounts, or according to a schedule of your choice, like a monthly pension, for example. There are no regular mortgage payments to make as long as you or your spouse live in the home. This is why reverse mortgages are gaining such popularity in Canada, Australia, the United Kingdom, Denmark, the USA, and other highly-developed countries.
Who can get a reverse mortgage?
In Canada you must be a homeowner aged 55 and older. If you have a spouse, then your spouse must be aged at least 55 as well. Lastly, you must live in a Canadian province, not a territory (such as Yukon or Nunavut).
Will a reverse mortgage affect my Canadian government benefits?
No. The cash from a reverse mortgage is tax-free income. Any government benefits you receive, such as Canada Pension Plan (CPP), Old Age Security (OAS), or Guaranteed Income Supplement (GIS) will NOT be affected.
How long does the reverse mortgage last?
It lasts as long as you want. This means that, as long as (1) the property taxes and insurance are in good standing, (2) the property remains in good condition, and (3) the homeowner lives in the home, then the loan won’t be called under any circumstances, even if the home decreases in value. If one spouse dies, the other can continue living in the home as long as he or she wishes, as long as these conditions are met.
How is a reverse mortgage repaid?
A reverse mortgage is repaid when the last surviving homeowner (the last borrower of the reverse mortgage) either leaves the home or passes away. Usually the home is sold and the money is used to pay back the reverse mortgage, and then the remaining cash is paid to you or to your Estate. If your Estate chooses to keep the home, the people involved can pay back the reverse mortgage loan by using/obtaining financing of their choice.
What are the homeowner's obligations?
Four simple things. One, you must live in the home (at least over six months per year, even six months plus one day is sufficient). Two, you must pay property taxes on time. Three, you must maintain the property's insurance. And four, you must maintain the property in good condition.
If I die, will my surviving spouse be stuck with paying back the reverse mortgage?
No. If one homeowner passes away, then the surviving spouse can choose to remain in the home (and doesn't have to make any payments) or sell the home. Reverse mortgages in Canada protect the homeowners' rights to live in their home as long as they choose.
How much money can the homeowner get?
Depending on your age, the maximum amount of cash you may qualify to receive is 55% of your home's value. For example, if you own a home worth $500,000, then you could potentially receive up to $275,000.
What determines how much money the homeowner gets?
Three factors determine how much money you can get. The first factor is your age (and, if you have a spouse, your spouse's age). The older you both are, the more money you can receive. The second factor is the type of home (for example: detached, condo, townhouse, etc.) and its location. If you own a home in a city, you typically qualify for more money than if you own a home in the countryside or in a rural community. The third factor is your home's current appraised value--how much it's worth, today. You can get an estimate right now of how much money you could get by clicking HERE.
What can I do with the mortgage funds, the cash?
You can use it as you please. Here are some things people with reverse mortgages currently do with their money: (1) they renovate their home, (2) they help the people they love, such as children, grandchildren, friends, etc., (3) they pay off debts, (4) they take care of unexpected expenses, (5) they enjoy the retirement they deserve, (6) they travel, go on vacations, go on cruises, (7) they purchase vacation properties. It's really up to you, the homeowner.
What if the homeowner already has an existing mortgage?
Not a problem. Many Canadians use a reverse mortgage to pay off existing mortgages and even other debts as well, such as credit card debt, car loans, etc. Any debts secured by the home (such as existing mortgages, lines of credit, home equity loans, liens, etc.) will be paid off from the reverse mortgage funds. The homeowner gets all the remaining mortgage cash.
Can I end up owing more than the home is worth?
No. As the homeowner, you keep ALL the equity remaining in the home. Since well over 30 years ago (in 1986, when the reverse mortgage was offered in Canada), over 99% of homeowners have equity (cash) left over when their reverse mortgage is repaid. Currently, on average, the amount of equity left over is more than 50% of the value of the home. How much equity you have will depend on how much you borrow, the home's value, and the amount of time that passes since the reverse mortgage is first put on your home. Keep in mind that, although not guaranteed, most homes will continue to increase in value, which can offset some (or even all) of the reverse mortgage's amount.
What happens if my home increases in value?
If your home increases in value, then your home equity increases - this means you have the option to refinance the reverse mortgage and pull out the additional equity in your home. If at any time you want more reverse mortgage funds, you always have the option of having your home re-appraised to determine how much more cash you are entitled to. If your home increases in value, and you choose to do nothing, then it means when your home is sold, there would be more funds left over that would go to you or to your heirs.
How does the homeowner receive the money?
There are options for you to choose from. You can receive all the money you’re eligible for in one lump sum advance, or you can take some now and more later. Another popular option is receiving planned advances, such as monthly, for example. It's your home equity that the reverse mortgage is freeing up for you, and you can access it the way you want.
What are the fees with a reverse mortgage?
Lotus Income charges NO FEES to the homeowner. The only "out of pocket" expense for the homeowner is the home-appraisal fee. The other fees are ALL paid for out of the mortgage funds. The 3 fees for a reverse mortgage in Canada are: (1) home appraisal fee (a one-time fee paid to the home appraiser, typically $250 to $450), (2) the fee for independent legal advice (a one-time fee paid to the homeowner's lawyer, typically $200 to $1000), and (3) the loan set-up and administration fee (a one-time fee paid directly to the reverse mortgage lender (the bank), which costs $1795. Nothing is paid by the homeowner to Lotus Income. Again, the only fee that the homeowner pays out of pocket is the appraisal fee.
Is a reverse mortgage a loan of last resort?
Absolutely not. Increasingly, reverse mortgages are recommended as an important component of a comprehensive, tax-efficient retirement plan. Financial planners and wealth managers are increasingly recommending reverse mortgages as a way to supplement Canadians' monthly incomes. Of the few alternatives to reverse mortgages, private mortgages and home equity loans are the real loans of last resort - their fees and interest rates are prohibitive to anybody on a fixed income, and they put the homeowner in danger of foreclosure and eviction. Reverse mortgages, on the other hand, have fair interest rates, only come from Canada's most highly-regulated banks, and will never require the homeowner to leave the home.
Is downsizing better than getting a reverse mortgage?
Downsizing is an option but most people underestimate the expenses, underestimate the time required to do it, and they underestimate how drastically it changes their lifestyles. Because home prices are currently so high in Canada, downsizing usually means at least 2 things: (1) moving into a smaller home, and (2) moving to different neighbourhood, city, or even province. Most Canadians don't want to leave the neighbourhoods they love. Often they downsize to free up money for retirement, but the extra cash is often gone sooner than they expect. Expenses often add up with renovations, unexpected costs, commissions paid to real estate brokers, legal fees paid to lawyers, and then there's the land transfer taxes. A reverse mortgage is a much more controllable, predictable way for homeowners to secure funds after they reach 55 years of age.
How is a reverse mortgage different from a home equity line of credit (HELOC)?
They are completely different products. A home equity line of credit (HELOC) is a short-term borrowing option for people who can pay the interest and loan in the near future. A HELOC requires the homeowner to make regular payments. Moreover, to get a HELOC in the first place, the homeowner has to qualify based on income, credit history, and so on. It's very important to remember as well, a HELOC is a demand loan (a "callable loan"), which means the lenders of the HELOC can require payment in full for any reason, at any time, at their discretion. This means HELOCs (and all mortgage types except for reverse mortgages) carry significant risks of non-renewal or cancellation by the lender. They carry the risk that requires the homeowner to re-qualify during the life of the loan, something that might not be possible if anything about the home, the borrowers, the real estate market, the economy, etc. has changed. None of these features apply to reverse mortgages. Unlike all other mortgage types, reverse mortgages are designed to protect homeowners aged 55 and older by offering them financial security and control. A reverse mortgage is a long-term financial solution. The cash from a reverse mortgage allows homeowners to prolong their retirement savings well beyond the possibilities offered by any other mortgage type.
What are the alternatives to a reverse mortgage in Canada?
The most common alternatives are (1) selling the home, (2) downsizing, (3) trying to take out a conventional mortgage or a line of credit, or (4) taking out a private mortgage, a home equity loan. Let's look at each. Firstly, in a 2018 survey, 90% of Canadian retirees did not want to move or downsize. Secondly, conventional mortgages and lines of credit both have ever-increasing income requirements, which means most Canadians aged 55 and older won't qualify. (It's hard enough now for fully-employed Canadians to qualify for a conventional mortgage.) Moreover, conventional mortgages and lines of credit require monthly payments. Lastly, private mortgages and home equity loans have high fees and high interest rates that are unsustainable for most people (even wealthy people) on fixed incomes. With the exception of reverse mortgages, all other home loan and mortgage products are put the homeowner in danger of foreclosure and eviction. Reverse mortgages will never require the homeowner to leave the home.
Is a reverse mortgage a "demand loan"?
No. Reverse mortgages are NOT demand loans, which are loans that give the lender the right to "call the loan" (demand payment) at any time, for any reason the lender sees fit. These reasons can be the death of a spouse (which could mean less household income), an anticipated fall or dip in house prices, etc. Reverse mortgages will not be "called" (demanding payment) at any time.