Canada vs The U.S.A. – Reverse Mortgage Differences

Most of us watch a lot of American TV and hear American media and news which sometimes can make things confusing when it comes to understanding similar products, like a reverse mortgage.

Have you read somewhere that the age to qualify for a reverse mortgage is over 62?  Have you been reading about terms such as HUD, HECM (Home Equity Conversion Mortgage), AARP, FHA or Churning?

All of these items only relate to the US reverse mortgage and have nothing to do with the Canadian reverse mortgage.

While both Canada and the U.S. have a reverse mortgage product – and in fact are the only 2 countries in the world to refer to the product as a ‘reverse mortgage’ – how they operate and the rules and laws behind them can be very different and can present unique challenges when trying to explain them to the newly acquainted.

Here we set out to clarify some of those differences. And if you’d like a fuller explanation check out our free guidebook on this (if you haven’t already) – get your copy here.

The History Of This Product In The U.S. And Canada

Reverse mortgages in both the U.S. and Canada have been around for over 30 years. While sometimes called Home Equity Conversion Mortgage (HECM) in the U.S., they are not referred to this as much any more.

In Canada, the product used to be called the ‘Canadian Home Income Plan’ or ‘CHIP’ – before being re-branded to the ‘CHIP reverse mortgage’.

While they both have the same idea – giving seniors access to their home equity – in the U.S., qualifying for is different in that:

  1. At least one spouse must be over 62 years old, whereas in Canada this is 55 for both applicants.
  2. In the U.S. only one spouse needs to qualify; in Canada both need to qualify.  This is a very important differentiation and is part of the reason reverse mortgages have a very bad name in the USA – we’ll talk more about this below.
  3. In Canada, applicants must obtain independent legal advice before being approved – this is not required in the U.S.

This is just for qualifying.

Another major difference between our two countries is that the closing costs (the fees associated with setting it up) in the U.S. tend to be much higher, as well as there are ongoing fees such as servicing fees.

The rules for qualification in the U.S. – in particular, requiring only one applicant be over 62 years old – became a major issue for some people when a spouse over 62 passed away and the remaining spouse was under 62, technically not qualifying for the mortgage.

Before 2014 (when the eligibility requirements were revised), the loan for the remaining spouse under 62 became due in full, often requiring them to lose their home.

This obviously is was a shock for many people who did not know or understand the terms of the product in the U.S. or were not properly made to understand prior to 2014.

This has never happened in Canada.

You can not get this mortgage unless both applicants are over 55, which makes sure that no one ever gets caught by surprise and loses their home by suddenly not qualifying!

Mortgage And Lending Standards In The U.S. Compared To Canada

Some of you may have seen the movie “The Big Short” or other movies about the 2008 financial housing market crisis. This is often what frightens people when it comes to mortgages in general, and about banks and mortgages in particular.

After 2008, 734 US banks were bailed out according to CNN.

734. That’s a big number.  That’s almost more banks than there are across the whole of Canada.

However, in Canada, that number was zero.

Banking continues to be much more conservative here in Canada, which generally means that they are willing to take on less risk, and in the case of reverse mortgages, are less likely to approve someone to receive this if they feel like they may not be able to recover their money – that is if the property won’t appreciate in value to offset the interest that accumulates.

This means that you can be a lot more confident that when you take out this financial product here in Canada, you are going to be financially okay and be able to make the most of your money and still leave your home equity in sound condition.

And if you’re interested in the data, 99% of Canadian homes have equity remaining when the reverse mortgage is discharged.

Similarities Between Canada And The U.S.

This takes us to similarities between reverse mortgages in the U.S. and Canada:

  1. In both the U.S. and Canada, you cannot take this out for more than half the equity in your home (the number is actually 55% in Canada).
  2. To receive the funds, you must not have any outstanding mortgages, outstanding property taxes, or other loans against the home – these can however be paid off and deducted from the amount you borrow – if necessary.  Any proceeds after paying these off can then be kept.
  3. You never have to make monthly payments towards it.

The first point, as seen in some of our previous articles, protects borrowers from being able to pay off the reverse mortgage at the end of the loan from their remaining equity. This protects borrowers substantially by ensuring that they or their families don’t become burdened financially should they move or pass away.

The second point ensures that you are in full possession of your home and can thereby access your full home equity to be able to use the money. This actually protects both you and the lender.  It protects you because by removing any existing mortgage, you are protected from losing your home for not paying it; it also protects the lender from this happening – they would lose out if this happened as well.

Lastly, payments on towards the mortgage – in both Canada and the U.S.A. – are voluntary.  You can make payments if you like – to pay down the interest for example – however you are not required to do this in any way, shape or form.  And over 95% of reverse mortgage holders in Canada that we work with choose not to make any payments.

In Summary: Canada vs The U.S.A.

So you can see how the idea behind reverse mortgages in the U.S. and Canada is the same – give seniors access to the home equity they have built up in their home so they can use the funds during their retirement. But beyond that, the similarities start to disappear.

The way reverse mortgages are structured in Canada give borrowers more protection and prevents unfortunate cases of people losing their homes as was the case in the U.S. prior to 2014.

If you are thinking about getting a reverse mortgage in Canada, we can assist you. For example, check out this article on the costs of a reverse mortgage, or this article looking at the alternatives to a reverse mortgage.

 

Or if you have any further questions about how reverse mortgages work in Canada, compared to the U.S.A. then leave a comment below and we’ll get back to you.

 

Comments 10

  • I have been in contact previously with a rep re CHIP and was told we could qualify for a reverse mortgage but found him somewhat unprofessional and hard to understand and
    vague on some inquiries. this was supposedly from a local (Vancouver BC office.
    We have a home on 3 acres in rural area in ( Bella Coola B C ) Home is 40 years old and mortgage free.
    I am 71 and my wife is 68 and we are not interested in leaving property to our two adult children who have successful lives of there own and could buy out the mortgage if need be.
    Thank you for your time, Peter

    • Hi Peter

      Sorry to hear about that, I do that even some mortgage brokers are confused about reverse mortgages – so that could be the case with you.

      It looks like you already submitted an assessment, so hopefully you’re now getting the help you need.

      Thanks,
      Mich

  • As for CHIP, do interest vary from lender to lender. How about hidden fees? What should I look ou for when applying?

    • Hi Will,
      There is actually only one provider of the CHIP reverse mortgage in Canada, and that is Home Equity Bank, so the terms and rates will be the same no matter who you talk to. As for the hidden fees – I think you will find this article useful, it outlines all the costs associated with a reverse mortgage. https://www.reversemortgagepros.ca/isnt-right/
      If you have any other questions or would like to chat with a qualified agent, you can call us Toll-Free at 1-888-358-7771 and someone will be happy to help you.

      Thanks,
      Mich

  • So one has to be mortgage free and tax free to qualify?

    • Hi There

      This is a common misconception. You do not have to be mortgage free to qualify, in fact, one of the most common reason we see for people to get a reverse mortgage is to pay the existing mortgage and eliminate that monthly payment and help with monthly cash flow. If your property taxes are in arrears, those could be paid from the reverse mortgage funds.

      Thanks,
      Mich

  • How long of a process is there to getting approved and for what value? Our mortgage is due on Nov 1, 2017. Secondly I am 57 yrs old my wife won’t be 55 until March of 2018. Is there any lee-way here?

    • Hi Dave

      The process takes around 3-4 weeks on average. We would have time before your mortgage is up for renewal.

      In your situation, what I would suggest is that we could look at a shorter term mortgage option for you (eg. 1 year or 2 year deal) before your wife turns 55. For example, if you took out a 1 year term mortgage – with no penalty for early repayment – then you could simply wait and take out a reverse mortgage once your wife had turned 55.

      It looks like you’ve already applied and one of my team is working with you – feel free to reach out to me directly with any further questions.

      Thanks,
      Mich

  • How is interest calculated and does it compound, ie added to the mortgage ?

    • Hi Raymond

      Interest is calculated and compounded semi-annually (twice a year) – the same as almost every other mortgage in Canada. The exception to this is a Home Equity Line of Credit, where interest can be compounded monthly if not daily.

      It would be added on to the balance owed – yes. For more on this, I suggest you check out our article on interest rates and penalties – it’s at https://www.reversemortgagepros.ca/rates-and-penalties/.

      Thanks,
      Mich

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