A reverse mortgage allows you to unlock the equity built up in your home through either a lump-sum payment or through monthly deposits. Instead of making mortgage payments, you will be receiving payments. These funds are borrowed and can be up to 55% of the value of your home in Canada. You must be 55 years or older to apply for a reverse mortgage.
Interest accumulates on the borrowed balance, but no monthly payments are required to be paid. No income is required either, which is particularly useful for seniors with no income during retirement. The borrowed balance of the reverse mortgage must be paid when the last homeowner dies, moves or the home is sold.
Since you do not need to make any payments during the lifetime of the reverse mortgage and interest will accumulate, you may have less equity in your home when the reverse mortgage is paid off.
Since the goal of a reverse mortgage is to unlock the equity in your home, any loans tied to your home must be paid off beforehand, such as a mortgage or a HELOC. You will then receive a tax-free lump sum or regular payments which can be used for anything, such as household expenses or renovations.
A reverse mortgage can be particularly useful for older homeowners who have a large amount of equity in their home but are finding their income limited, such as their pension or retirement funds. Payments received from a reverse mortgage can help supplement or entirely replace other income sources.
Money that is borrowed is tax-free, and it will not affect Old-Age Security or Guaranteed Income Supplement benefits. However, interest rates can be higher than regular mortgages rates, and this can mean that your equity stake in your home can decrease over time. Your estate will need to repay the reverse mortgage when you die. There are only two reverse mortgage providers in Canada: HomeEquity Bank and Equitable Bank. HomeEquity Bank's Canadian Home Income Plan is also known as CHIP.
HomeEquity Bank’s CHIP reverse mortgage is the most popular option in Canada and has been the only option until Equitable Bank entered the reverse mortgage market in 2018. Canada’s reverse mortgage market reached $4 billion in 2020, with CHIP reverse mortgages contributing to $820 million in new originations in 2019 alone. Meanwhile, Equitable Bank only holds $20 million worth of reverse mortgages.
To qualify for a CHIP reverse mortgage, you must be 55 years or older. Your spouse must also be 55 years or older. Your home must also be worth at least $150,000. You can borrow up to 55% of your home market value, and HomeEquity guarantees that the amount that you will have to eventually repay will not exceed the market value of your home when it is sold.
The reverse mortgage can be paid off in full early, however, fees may be charged. Payments can be received as a lump-sum payment, or monthly installments can be scheduled. Homeowners will also keep any appreciation in the value of the home.
Equitable Bank’s reverse mortgage is only for properties in major urban centres in British Columbia, Alberta, Ontario, and Quebec, and for homes with a value of at least $250,000. You must also be 55 years old or older, and live in your home for more than 6 months per year as your primary residence.
The minimum amount you can borrow from Equitable Bank's Reverse Mortgage is $25,000. Equitable Bank offers a no negative equity guarantee, where you will never owe more than the market value of your home when it is sold.
You can choose from a variety of fixed terms, ranging from 6 months to up to 5 years. If you choose a fixed interest rate, you can not schedule payments. Instead, payments will be requested as single advances, with the minimum amount of each payment being $5,000. These payments can be requested at any time.
Payments can be scheduled for up to 20 years if your interest rate is adjustable. Minimum payments depend on the frequency of your scheduled payments, with each payment accruing interest at the current adjustable interest rate at the time of each payment.
Under both the fixed and adjustable interest rate products, there is an initial minimum payment of $25,000.
As of December 2020, the current reverse mortgage interest rate by Equitable Bank ranges from as low as 3.49% for 1-year fixed to as high as 4.39% for 5-year fixed and adjustable rates. CHIP reverse mortgage rates are even higher, starting at 3.89% for a 1-year term to up to 4.59% for a 5-year term, before closing and administrative costs.
Equitable Bank entered the reverse mortgage industry in 2018 to compete against CHIP reverse mortgages, which were the only option until then. Equitable Bank seeks to offer lower rates by cutting costs, as they require funds to be drawn in advance. Even so, CHIP reverse mortgages account for over 99% of the reverse mortgage market, with Equitable Bank at less than 1% market share.
Both CHIP and Equitable Bank reverse mortgage rates are much higher than current mortgage interest rates in Canada.
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If you do not want to increase your debt load and want to retire debt-free, a reverse mortgage might not be right for you. However, some homeowners might be forced to rely on a reverse mortgage during retirement as a source of income, where selling their existing home might mean having to downsize. Lower incomes during retirement might also mean that seniors can have difficulty qualifying for a regular mortgage, and might need a reverse mortgage instead.
If you do have an adequate level of income, a home equity line of credit might be a cheaper alternative. HELOCs allow you to borrow up to 65% of the value of your home, versus a reverse mortgage’s 55% limit, and HELOC rates are lower than reverse mortgage rates. A HELOC is also much more flexible than a reverse mortgage, as you only borrow from it when you need it. A reverse mortgage requires either lump-sum or regularly scheduled payments, often with a minimum required amount to be borrowed each year.
Reverse mortgages might be useful for some homeowners, but they can also be harmful for others. A reverse mortgage means that your children or estate will inherit the loan, which will need to be paid off in a set period of time after you die. This means that your beneficiaries may receive significantly less than they otherwise would. Seniors who do not want to increase their debt levels during retirement might also want to avoid reverse mortgages.