Reverse Mortgages in Canada 2023
What is a reverse mortgage?
A reverse mortgage is the only mortgage which does not require any periodic payments. A reverse mortgage is a loan secured by real estate which becomes due when the borrower dies, moves or sells the collateral. This is in contrast with a conventional mortgage or a high ratio mortgage, where you pay the bank monthly mortgage payments, which include both interest and principal. A reverse mortgage also contrasts with a HELOC, where you need to pay the interest as your minimum payment. In a reverse mortgage, interest is added to the principal of the mortgage, and thus the reverse mortgage balance increases over time. Practically, a reverse mortgage allows you to consume your home equity while still living in it.
Reverse Mortgage Features
You can receive tax-free recurring payments, a big one-time payment, or a combination of both. You do not need to pay back this money until you move, sell, or die. With the money, you can:
- Have an income source in retirement
- Pay off debt
- Make home renovations
- Support family
- Pay for in-home care
Reverse Mortgage Eligibility
In either a conventional or high ratio mortgage, you are required to make periodic payments which would reduce your debt over time. As the loan-to-value (LTV) ratio decreases over time, the risk associated with your mortgage decreases. While in a reverse mortgage, accumulation and compounding of interest potentially increases LTV and, thus, the risk associated with your mortgage.
Because no payment is required, you do not need any income documentation, and your credit score is of limited value to the lender. Reverse mortgage eligibility criteria are set to mitigate the risk arising from an increasing LTV ratio.
You may be eligible to borrow up to 55% of your home equity through a reverse mortgage if you meet the criteria listed below. Additionally, you can use a reverse mortgage calculator to see how much you can borrow.
- Everyone on the home's title is 55 or older. The higher their age, the more money they can borrow in a reverse mortgage.
- The home is your primary residence (you live there for six months minimum each year). Primary residence status is important because almost all proceeds from the sale of your primary residence can be used for paying your debts. In contrast, part of the proceeds from selling other properties belongs to CRA as income tax on capital gains.
- The home type is detached, semi-detached, condo or a townhouse.
- All property title holders apply as joint borrowers with you.
How Does A Reverse Mortgage Work in Canada?
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 then choose to receive a lump sum or regular payments which can be used for anything, such as household expenses or renovations. These payments are not subject to income tax because they are not income; they are money you borrowed.
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 (their pension, retirement funds and potentially their salary) inadequate. In other words, reverse mortgages are suitable for those who are house rich but cash poor.
Money that is borrowed is tax-free, and it will not affect Old-Age Security or Guaranteed Income Supplement benefits. Reverse mortgage interest rates are higher than regular mortgage rates, which means that your equity stake in your home decreases over time. There are three reasons for reverse mortgages charging higher rates of interest compared with insured or conventional mortgages.
There are three reasons for reverse mortgages charging higher rates of interest compared with insured or conventional mortgages.
- The federal government has created special mechanisms for Canadian banks and non-bank lenders like credit unions and B-lenders to monetize their insured and conventional mortgages. For example, the framework for the monetization of insured mortgages is set by the National Housing Act. Thus the securities created from insured mortgages are called National Housing Act mortgage-backed securities (NHA-MBS). Lenders' ability to monetize mortgages significantly reduces their funding costs and enables them to offer lower rates on these mortgages.
- Many mortgage lenders in Canada offer conventional mortgages, high ratio mortgages and home equity lines of credit, but only HomeEquity Bank and Equitable Bank offer reverse mortgages. The absence of competition in the reverse mortgage market results in higher reverse mortgage rates.
- Reverse mortgage lenders face longevity risk. If a reverse mortgage borrower lives much longer than the lender expects them, the accumulation of interest can push their debt above the fair market value of their home. Canadian reverse mortgage lenders guarantee your reverse mortgage debt does not exceed the fair market value of your home. Reverse mortgage rates are higher to compensate lenders for this risk.
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.
Reverse Mortgage Pros vs Cons
In an environment of rising home prices, reverse mortgages work great. Increases in home prices reduce the LTV ratio and thus reduce the lender's risk. While the homeowner can order a new home appraisal and increase the money, they can borrow against their home equity. While in a stagnant or falling housing market, the senior is limited to the initial amount of loan they are offered. When they spend that money, their equity in their home falls over time. If they have to leave their home in their later years, they are likely to have no equity left in their home.
Thus, a reverse mortgage might be beneficial to some but might also be a not-so-great option for others. Here are the pros and cons of a reverse mortgage.
Pros/Advantages
- No payments required until you move or sell: This can be helpful for those who cannot afford to make payments, or even interest-only payments, that would normally be required for other loans.
- Turns your home equity into tax-free cash: This allows you to unlock your home equity without selling your home. Thus reverse mortgage can serve as an alternative to downsizing for retirement if you like to keep your home either because of an emotional connection or because you think it will appreciate fast.
- Allows you to still own your home: You remain the owner of the home, not the bank.
- Flexible options can set-up a steady stream of cash: You can choose to borrow a lump-sum amount or set-up a recurring monthly, quarterly, semi-annual, or annual advances.
- Does not affect OAS (Old Age Security) or GIS (Guaranteed Income Supplement) benefits
- You can use it as a down payment for a second home.
Cons/Disadvantages
- Higher interest rates than regular mortgages: This increases the cost of borrowing.
- Requires a home value of at least $250,000 for a CHIP reverse mortgage and $250,000 for an Equitable Bank reverse mortgage.
- Interest accrued will reduce your home equity: In exchange for requiring no interest payments during the life of the mortgage, your home equity will be reduced.
- Fees if you pay off the reverse mortgage early: Paying off a reverse mortgage early will incur a prepayment charge
- May require you to borrow a minimum amount: For example, Equitable Bank requires you to borrow at least $25,000 initially, even if you do not need the full amount.
How to Get a Reverse Mortgage
Step One: Initial online application
Both CHIP and Equitable bank offer online applications. You may need to answer basic questions about your personal information and finances within the application. After completion, you will get an immediate estimate of how much you can borrow.
Step Two: Consultation
Next, the lender will reach out to answer any questions and learn more about your financial situation. Unlike the typical mortgage documents required in Canada, you do not need proof of income or down payment. However, they want to know if any other loans are registered on your property. If there are other loans, you will likely need to pay them off with the money you receive from the reverse mortgage.
Step Three: Finalizing
The lender will finalize terms of the reverse mortgage with you. There are multiple options for receiving your payments. You can choose between a recurring, ad-hoc, or a large one-time payment. You can even combine various ways to receive payments. For example, you can choose to receive $50,000 initially and $5,000 every six months.
The lender will also conduct a property appraisal to ensure your property is functioning correctly. If there are any issues, they will deduct money from your initial lump sum to fix it.
Step Four: Repayment
No payments are required until the last registered homeowner leaves the house. However, you can make pre-payments which are subject to penalties if you choose.
Where to Get a Reverse Mortgage
In Canada, there are two major providers of reverse mortgages. Initially, HomeEquity Bank was the only financial institution to offer reverse mortgages through their Canadian Home Income Plan (CHIP).
More recently, Equitable Bank started offering reverse mortgages at lower rates in 2018. However, they have more requirements, such as living in a major city within Ontario, Quebec, British Columbia, or Alberta. Continue reading to learn more about the two companies.
CHIP Reverse Mortgage
HomeEquity Bank’s CHIP reverse mortgage is the most popular option. Canada’s reverse mortgage market reached $4 billion in 2020. CHIP reverse mortgages contributed $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 Reverse Mortgage
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.
Equitable Bank’s Minimum Disbursements by Scheduled Frequency
| Frequency | Minimum Payment |
|---|---|
| Monthly | $500 |
| Quarterly | $1,500 |
| Semi-Annually | $3,000 |
| Annually | $6,000 |
Today's Reverse Mortgage Rates:
For a full list of rates for various terms and products, visit our reverse mortgage rates page.
Equitable Bank entered the reverse mortgage market in 2018 to compete against CHIP reverse mortgages, which were the only option then. Equitable Bank seeks to offer lower rates by taking less risk. To manage risk, it only lends against the security of homes in the more active housing markets like the Ontario Housing market and the British Columbia housing market. Even in those markets, Equitable offers reverse mortgages with a lower LTV than the HomeEquity Bank. As a result, CHIP reverse mortgages have the lion's share of the reverse mortgage market.
Both CHIP and Equitable Bank reverse mortgage rates are much higher than current mortgage interest rates in Canada.
Frequently Asked Questions
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.
Yes, you can make prepayments up to a certain limit without charge.
- Interest: For Equitable Bank, you can prepay outstanding interest once per month.
For CHIP, you can only prepay interest through fixed automatic withdrawals. - Principal Payments: For Equitable Bank, you can prepay up to 10% every 12 months.
For CHIP, you can prepay up to 10% every 12 months within 30 days of the anniversary date of the reverse mortgage. - After 5 Years with Equitable Bank, you can prepay more than 10% within 30 days of the interest reset date of your mortgage.
- After 10 Years with Equitable Bank, you can prepay more than 10% at any time.
- After 5 Years with CHIP, you can prepay any amount within the 30 day period after your interest reset date.
Reverse Mortgage Pre-Payments
| Equitable Bank | CHIP | |
|---|---|---|
| Interest Payments | Prepay interest once per month. | Prepay interest through fixed withdrawals. |
| Principal Payments | Up to 10% of your principal every 12 months. | Up to 10% of your principal and outstanding interest every 12 months within 30 days of your mortgage’s anniversary date. |
| After 5 Years | More than 10% of your principal and outstanding interest within 30 days of your interest reset date. | Any amount within 30 days after your interest reset date. |
| After 10 Years | More than 10% of your principal and outstanding interest at any time. | - |
Reverse mortgage payments are not taxable.
Since the money that you receive is considered to be a loan advance, the money would not be taxed as income.
A reverse mortgage is repaid when you sell your home, move, default, or die. The lender will usually guarantee that you will not owe more than the fair market value of your home. If you pass away, your estate will repay your reverse mortgage.
Since there are not interest payments required, a reverse mortgage default would occur if you break the terms of your reverse mortgage contract, such as not maintaining your home or lying on your application.
If you already have a mortgage, you can still get a reverse mortgage. Your mortgage will need to be paid off from the funds from the reverse mortgage so that the reverse mortgage can be the first lien on the home.
If your spouse dies, you will continue to be a borrower. The reverse mortgage will only be required to be paid back if both borrowers die in the case of spouses, if you sell the home, or you move.
Yes, bad credit will not prevent you from getting a reverse mortgage.