Area of Law: Seniors / Elder Law
Answer # 729
What is a reverse mortgage?Region: Ontario Answer # 729
A reverse mortgage is a financial tool that allows homeowners to access the money they have invested in their homes. It allows homeowners who have little or no income to continue living in their home while they use their property as a source of income. Reverse mortgages are available to homeowners who are at least 55 years of age and whose home is entirely paid for.
Currently, there are only two financial institutions in Canada that offer reverse mortgages. The HomeEquity Bank CHIP Reverse Mortgage is available across Canada directly from HomeEquity Bank or through a mortgage broker. The PATH Home Plan from Equitable Bank is available through mortgage brokers in Alberta, British Columbia, Ontario and Quebec.
How does a reverse mortgage work?
A reverse mortgage is a good option for homeowners who need cash to pay for living expenses, but who do not have liquid assets. With a reverse mortgage, a percentage of the value of the home is converted to cash and is used to purchase an annuity, which provides the homeowner with a guaranteed income. The cash advance is registered against the title of the home as a mortgage, but unlike an ordinary mortgage, no regular payments need to be made.
With a reverse mortgage, the bank or other lending institution will pay the homeowner cash. The loan amount can be up-to 55% of the current value of the house and can be paid in a lump-sum, in regular monthly installments, or a combination of both. If the house is sold or the house is no longer the homeowners principal residence, they must repay the loan and any interest that has accumulated.
After the homeowners’ death, the home will be sold and the bank will collect the mortgage amount plus interest. Any money that is left over after the home is sold and the bank is paid will be available to the beneficiaries or dependents of the homeowner.
Advantages to a reverse mortgage
There are both advantages and disadvantages to reverse mortgages. Advantages include:
- No regular payments need to be made on the loan;
- Some of the value of the home can be turned into cash, without it having to be sold;
- The money borrowed is a tax-free source of income;
- The income does not affect the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits the homeowner may be receiving;
- The homeowner maintains ownership of their home;
- The homeowner can decide how they want to receive the money, either by a lump-sum payment; an annuity; or, a combination of both these options; and
- The homeowner can use the equity in their home to improve their standard of living.
Disadvantages to a reverse mortgage
Some disadvantages to reverse mortgages include:
- The costs associated with a reverse mortgage are usually quite high, and can include: a higher interest rate than for a traditional mortgage or line of credit; a home appraisal fee, application fee or closing fee, a repayment penalty for selling the house or moving out within three years of obtaining a reverse mortgage, and, fees for independent legal advice;
- At the homeowners death, the estate will have to repay the loan and interest in full within a limited time;
- Since the equity held in a home will decrease as the interest on the reverse mortgage accumulates over the years, there will be less money in the estate to leave to the children or other beneficiaries.
Where can you get a reverse mortgage?
Reverse mortgages are available through most of Canada’s chartered banks, many credit unions, mortgage brokers, and investment and financial planning firms.
You can obtain more information about reverse mortgages from an investment advisor or from a bank. Information is also available from the Financial Consumer Agency of Canada.
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