In the last couple of decades, Canadians have seen incredible growth in home values. So if you’re one of the lucky folks that bought a home early and held, you’re probably eyeing some of that home equity to fund your retirement with a reverse mortgage.
You have two options at this point. Either sell your home or take out a mortgage. If you still want to keep your home, selling isn’t a great option. But standard mortgages require a monthly payment, which is tough to manage on a fixed income. Luckily there’s still a way of tapping into that equity without selling your home.
One of the ways of drawing some of that built-up equity out of your home is with a reverse mortgage. Reverse mortgages aren’t offered by the traditional Big 5 banks, so mortgage brokers in Canada are the best people to talk to if you’re considering tapping into your home equity. Here’s a run-down of everything you need to know.
What is needed to qualify for a reverse mortgage?
A reverse mortgage is a type of loan available to homeowners who are 55 or older, where they can withdraw up to 55% of the equity that has been built up. This process is also sometimes referred to as an “equity release.”
Home equity is the amount of money that you own through your home versus the amount you still owe on the mortgage. Having 100% home equity means that the mortgage has been entirely repaid.
This kind of arrangement is perfect for Canadians entering retirement. They can enjoy their lives without having to downsize due to a more restrictive budget.
A reverse mortgage is also a great solution for those who would like to do some renovations on the home and add value. It’s even possible to add enough value so that the reverse mortgage loan can be canceled out through the profit of the sale.
Some may also use a reverse mortgage to consolidate pre-existing debt or to make a big purchase. Many will also look into their home equity to pay for unforeseen medical expenses that aren’t covered, such as assisted living or having a home health care aid.
When Can I Get a Reverse Mortgage?
Prior to being approved for a reverse mortgage, applicants will need to repay and close any outstanding loans that use the home as security collateral. This includes any lines of credit as well. Luckily, it’s possible to use the reverse mortgage to repay the loans.
Reverse mortgages are often released as a lump sum, but they can also be portioned out over time. Different lending institutions will have different procedures, processes, and requirements, so it’s best to speak with your mortgage broker to find out the specific details for your mortgage product.
How Do You Pay Back a Reverse Mortgage?
There are actually a few ways of repaying a reverse mortgage. But like any loan, a reverse mortgage will have both principal and interest amounts owing.
There’s no penalty for repaying the loan in full, but there are certain situations that will trigger the need to repay the entirety of the loan. You must repay the full amount when:
- The home is sold
- The borrower ceases to live at the home with the reverse mortgage
- When the borrower passes away
- When the borrower defaults on the loan
Most people believe that defaulting on the loan is simply failing to keep up with payments. However, the loan will also be defaulted on if the money is used for anything illegal, if the application is inaccurate, if the home value drops due to neglect or if any of the terms of the loan contract are violated.
When a homeowner with a reverse mortgage passes away, the total repayment will be due from the estate. If there’s more than one owner of the home, the loan must only be repaid when the last homeowner passes away or sells the home.
Do Canadian Banks Offer Reverse Mortgages?
There are just two institutions that offer a reverse mortgage in Canada. These are the HomeEquity Bank which offers the Canadian Home Income Plan (CHIP), and the Equitable Bank. HomeEquity CHIP loans are available across Canada, whereas Equitable Bank reverse mortgages are only available in some cities.
Reverse mortgages can be secured from either institution directly or through a mortgage broker. The benefit of going through a mortgage broker in Canada is that you will get much-needed advice and assistance through the process. Mortgage brokers are often able to secure rates that are not available to the general public.
Some brokers will provide reverse mortgage calculators that will help you to determine if this path is the right one for you before you even have to walk out your front door.
A reverse mortgage calculator will use a simple equation based on your home value and remaining mortgage plus interest amount to see what equity is available.
The Pros and Cons of a Reverse Mortgage
As with any loan, there are going to be some pros and cons with a reverse mortgage.
- You will not have to make regular monthly payments
- You get to keep your home
- You can access the cash equity of your home without selling
- There are flexible disbursement options
- The borrowed amount is tax-free
- There will be no impact on your Old Age Security or Guaranteed Income Supplement
- The interest rate could be higher than your mortgage interest rate
- Your family will inherit less since the loan repayment will be due
- Your estate has a set amount of time to repay the loan, and this could be longer than the amount of time needed to settle your estate through probate
It’s always important to learn as much as possible about a loan before signing the contract. That’s where having a mortgage broker on your team can be a major asset.
Finding a Mortgage Broker in Vancouver
A mortgage broker is able to dedicate more time to you and your concerns as you go through the application process. They will take the time to ensure you understand the terms and requirements and can also communicate any concerns with your family as well.
As a mortgage broker in Canada, my team and I are experienced with securing reverse mortgages and ensuring that the process is as thorough and painless as possible so you can spend more time enjoying your life. If you or your family member are interested in securing a reverse mortgage, please don’t hesitate to reach out at any time.