Breaking A Reverse Mortgage – Switching Lender, Refinancing Or Paying It Off

For existing reverse mortgage holders – or anyone considering a reverse mortgage who wants to plan for future issues – the subject of breaking a reverse mortgage is an important one.

By ‘breaking a reverse mortgage’ I mean switching it (to another lender), refinancing it (for example, increasing the amount being borrowed) or paying it off.

This is a particularly important article and video for anyone who has received a renewal rate from their existing reverse mortgage lender at the end of a 1,2,3,4 or 5 year term – as lenders tend to add premiums on to their renewal rates and some of them can be quite significant.

In this article I’m going to discuss all your options when it comes to breaking a reverse mortgage, including some very important considerations when it comes to penalties that you likely haven’t heard before.

This article applies to you intentionally breaking your reverse mortgage, when it comes to a reverse mortgage naturally ending – for example, with all the homeowners passing away – this is something I’ve covered in more detail in this article instead: What Happens When A Reverse Mortgage Ends

As always, you can watch the video version of the article or read it in detail below:

The 3 Ways To Intentionally Break A Reverse Mortgage

There are 3 primary ways and reasons that you might want to break a reverse mortgage:

Paying it off – You can repay the loan at any time, although early repayment will incur penalties. Penalties are discussed below and also in more detail in this article: Reverse Mortgage Penalties Explained
Moving it to another lender – Often called “switching” in the mortgage industry, this involves transferring your reverse mortgage to another lender. Often the reason for this is to get a better interest rate.
Refinancing – You can also refinance, either with your current lender or a new one, typically to access more funds. The difference between refinancing and moving it (when it comes to reverse mortgages) is that refinancing means increasing the amount borrowed – I’ll discuss this more below.

Why Break a Reverse Mortgage?

There are several reasons you might want to break your reverse mortgage:

You need access to more money.
There are better rates available with other lenders
You no longer need the funds provided by the reverse mortgage.
You’re selling your home or no longer require it.

Paying Off & Ending A Reverse Mortgage

You’re free to pay off your reverse mortgage at any time. This will involve paying off the amount you borrowed, along with any accumulated interest.

However, keep in mind that early repayment is subject to penalties. I am going to discuss them in this article – including some important timing considerations for breaking a reverse mortgage – they are also discussed in detail in this article: Reverse Mortgage Penalties Explained

Generally speaking, it is not a good idea to repay a reverse mortgage in the first 3 years, as penalties are at their highest.

Outside of the first 3 years, penalties actually increase each year – but I’ll provide examples and explain this in more detail further into the article.

If you’re considering repaying your reverse mortgage early, be sure to factor in these costs and whether they’re worth it for your financial situation.

Refinancing or Switching a Reverse Mortgage

Refinancing and switching a reverse mortgage (to a different lender) are essentially the same process.

With a regular mortgage there is a difference: you can switch your mortgage to a different lender and the costs to do this are generally lower and you’ll get better rates. The application process is also less intense.

But with a reverse mortgage, switching and refinancing are exactly the same thing: the rates, costs, process and everything is exactly the same.

So, for the purposes of this article, I’m going to group both together.

It’s worth noting that switching your reverse mortgage to a different lender also presents an opportunity to refinance it (at no additional cost) you want to access additional funds.

“But I Signed Up For A 5 Year Term – Am I Not Stuck?”

You might be wondering if signing up for a five-year term locks you into that lender or prevents you from paying off your mortgage early.

With a reverse mortgage, terms don’t work the same way as they do with traditional mortgages:

For a regular mortgage: the term sets the interest rate and penalty amount. For example, if you have a 5 year term you get the opportunity to switch (or pay it off) at the end of 5 years with no penalty. And generally speaking (at least for fixed terms), the closer you are to the end of the term the lower the penalty will be.
For a reverse mortgage: the term only sets the interest rate. The term or length of term has no impact on the penalty you’ll pay for breaking the reverse mortgage.

This is a very important concept to understand – the fact that the term only determines your interest rate and has no bearing on penalties for breaking the mortgage.

What this means it that you can completely ignore the length of term you’re on when deciding if you want to break a reverse mortgage.

Reverse Mortgage Term – Simple Examples:

If you took out a 1-year term, there is a penalty to break the reverse mortgage at the end of 1 year and it is exactly the same as if you were on a 5-year term.
If you took out a 3-year term, there is a penalty to break the reverse mortgage at the end of 3 years and it is exactly the same as if you were on a 5-year term.
Essentially: the term has absolutely no influence on the penalty at all with a reverse mortgage

When To Switch Or Refinance A Reverse Mortgage?

While the term of your mortgage doesn’t influence penalties, the timing of when you switch (to a new lender) or refinance does.

Reverse mortgage penalties are based purely upon how long you’ve held the reverse mortgage for.

Penalties are highest in the first three years of your reverse mortgage and drop off after this, however, after the third year, they actually gradually begin to rise again – although never reach as high as they did in the first 3 years.

The best time to switch or refinance is typically between three and four years after taking out the mortgage.

But as long as you’ve passed the first 3 years – when switching is incredibly expensive – then switching anytime is probably a viable option (as long as the new interest rate justifies it).

I’ll walk you through a real life example to explain this below. But before I do, I want to make sure I cover exceptions.

Penalty Exceptions

Reverse mortgage lenders do offer some exceptions to the penalty rules:

After 10 years, there are no penalties for breaking your reverse mortgage – so you’re free to switch or refinance without penalty at that point.
Additionally, some lenders provide a short 30-day window at the end of 5 years during which you can pay off your mortgage without penalty.
If you’re moving into a retirement home or if the homeowner passes away, there are also provisions for reduced or waived penalties.

It’s also worth noting that – if you are switching or refinancing – you don’t actually physically pay the penalty – it would be reflected in your new reverse mortgage balance.

Penalties: A Real-World Example

Now, let’s look at an real world example to explain what all of this means.

Say you’ve taken out a reverse mortgage for $300,000.

You might be wondering when can you refinance or switch it to a new lender and what penalties would be payable?

For this example, I’m going to use the biggest lender in Canada for the penalty calculations – but the principles apply to all current lenders

Here’s how the penalties break down over time:

In the 1st year: ~$16,020
After 1 year: ~$13,688
After 2 years: ~$10,964
After 3 years: ~$6,528
After 4 years: ~$6,972
After 5 years: ~$7,447
After 6 years: ~$7,953
After 7 years: ~$8,494
After 8 years: ~$9,072
After 9 years: ~$9,689

(Interest rate does impact the penalty – these numbers are based on current interest rates – so will change over time)

As you can see, penalties are highest in years 1-3. They drop off in year 3-4 but then gradually start to increase again every year.

This chart shows what I mean:

As you can see, penalties are highest in the first 3 years then drop considerably to their lowest point in year 3-4 – before then increasing slightly each year.

As mentioned, after year 10 penalties are zero – so you’re free to switch or refinance without paying a penalty.

Other Costs and Considerations

Switching or refinancing your reverse mortgage isn’t just about penalties.

You’ll also need to weigh up:

The new interest rate and potential savings.
How much additional money you can borrow (if this is something you’re looking for).
Costs and fees with the new lender.

Ultimately it’s a simple math puzzle: will you save more in interest vs all the costs, fees and penalties for switching?

Remember too that the interest compounds – so you may only need marginal interest savings to make it worthwhile.

Rules Of Thumb – Savings Needed To Switch or Refinance

Here’s a rule of thumb you can use showing the amount you need to save on interest rates to make switching or refinancing worth paying the costs & fees – based on your reverse mortgage balance:

$100,000 balance: A ~0.6% lower rate will mean you save money.
$200,000 balance: A ~0.3% lower rate will mean you save money.
$300,000 balance: A ~0.2% lower rate will mean you save money.
$400,000 balance: A ~0.15% lower rate will mean you save money.
$500,000 to $1M: A ~0.1% lower rate will mean you save money.
Over $1M: A ~0.05% lower rate will mean you save money.

Note: this is just to cover the costs & fees – you’ll need slightly more interest rate savings to cover the penalties too.

But the important point is that, as you can see, as the balance gets larger the amount you save by switching becomes bigger – you only need a ~0.05% better rate with a balance over $1M because the costs and fees of switching are small compared to the interest you’re paying. If you’re getting a rate better than this your savings will be massive.

So another rule of thumb is: the larger your reverse mortgage balance, the smaller the interest rate saving you need to make switching worthwhile.

How Much Will You Save By Simply Switching Lenders?

The answer to this question is quite complicated but let me create a simple example.

Let’s go back to our $300,000 reverse mortgage holder.

We can assume they are switching after 3 years have passed in their reverse mortgage – so not paying the extremely high penalties that existing during the first 3 years.

So their penalty would be just below $5,000 at current rates.

After accounting for all costs, fees, penalties – here is what they’ll save in interest over the course of 5 years with a new lender – depending on the rate they get:

New lender offers a rate 0.5% better – they save ~$1,000
New lender offers a rate 1% better – they save ~$11,000
New lender offers a rate 1.5% better – they save ~$21,000

This assumes that the new lender doesn’t have any promotions (for example cash back, covering some of the costs) – any promotions would see significant further savings too.

So, Is It Time For Me To Switch Or Refinance?

If you can get a better rate and your reverse mortgage is over $200,000, it’s almost a no brainer to switch your reverse mortgage (after 3 years – to avoid the excessive penalties) due to the fact that the costs & fees to setup your reverse mortgage with a new lender are actually relatively small compared to the interest rate savings you’ll get.

For a reverse mortgage balance under $200,000, the calculations are generally a little closer – because the costs and fees are a higher proportion of smaller balances.

However, one of the lenders in Canada is running a promotion just now that effectively makes switching or refinancing free (they are essentially paying for all the costs & possibly even some of your penalty through a cash back offer) – so even a 0.05% better rate may make it worth switching with this deal.

Lender promotions & offers are of course another factor that you need to consider – as well as the fact these promotions might not exist forever.

If you are an existing reverse mortgage holder (and have had your reverse mortgage for more than 3 years) then you can fill out this form and I’ll run the numbers for you to see if it’s worth you switching (particularly with this promotion):

Free Assessment – See If Switching Your Reverse Mortgage Makes Sense For You

In Summary – Breaking A Reverse Mortgage – Switching Lender, Refinancing Or Paying It Off

Breaking a reverse mortgage – by either moving it to a new lender or paying it off – is an option available to anyone regardless of what term you’re on.

Penalties are payable – they are not linked to your term but rather how long you’ve had the reverse mortgage. It’s also worth noting that you don’t actually physically pay the penalty if you were switching lender or refinancing – it would be reflected in your new reverse mortgage balance.

The penalties are highest in years 1-3, lowest in year 3-4 and gradually increase after this up until year 9-10 – after which they are zero.

In making the decision you’ll need to weigh costs, savings & any lender promotions (which may not last forever).

Ultimately, it’s a simple math puzzle but (generally speaking) you only need a very small saving in the interest rate for a balance over $200,000 to make it worth switching – especially if you’re able to switch into a promotion with the new lender. The calculation tends to be a lot closer on balances under $200,000.

Get A Free Professional Reverse Mortgage Assessment

If you already have an existing reverse mortgage and have received a renewal rate or are considering switching it to another lender, you can get a free assessment where I’ll run the numbers and see if this works for you – use this free, 90 second form: Free Assessment – See If Switching Your Reverse Mortgage Makes Sense For You
If you don’t have a reverse mortgage and would like a free assessment – by a Chartered Accountant and the #1 Reverse Mortgage Broker in Canada – to recommend the right lender and product, as well as advise if this is the right solution for you, you can do so here: Get A Free Professional Reverse Mortgage Assessment

Both of these services are completely free and there are no pushy sales pitches – I simply provide the information for you and let you decide if it’s something you want to pursue.

Mich Sneddon, CPA, CA

A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada. I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.