Quite often we get asked the question about what hidden or buried costs there are in a reverse mortgage.
This is largely because the whole product can come across of having a feeling of being too good to be true. Being sceptical like this is a good thing considering how many financial products out there bury their costs or have hidden fees that you don’t learn about until it is too late.
Today, in response to many of the queries on this, I thought I’d go through all the costs involved in setting this up.
That is, the initial costs before you do anything else.
This will include every single cost you need to know about – you can factor these into your decision.
The best way to think about reverse mortgage costs are to split them between costs that must be paid upfront (by you) and costs that deducted from the amount you borrow (you don’t actually pay these yourself):
1. Costs You Pay Upfront – Out Of Pocket Costs: $150-400
Let me first clarify what I mean by ‘out of pocket’.
This means that you have to pay these costs upfront and there is no other option or way to pay them. The phrase – for those not familiar with it – comes from taking the cash out of your pocket and giving it to someone.
So what ‘out of pocket’ costs are there?
Well, the good news is that there is only one: the appraisal.
Appraisal costs will depend on where you are in Canada but you are talking about something in the range of $150-400 – with most coming close to the $300 range.
Why is an appraisal required?
Well you have to remember that the lender isn’t going to take any payments from you. They are lending solely on the basis that they believe your home will continue to grow in value and that they’d like a share of that value.
This is from a lenders perspective – ownership of many homes across Canada. So they absolutely must ensure that your home is a good investment for them.
So, this means that they must appraise your home. A home appraiser is looking for 3 things:
- What is the house worth based on current market value?
- Any issues that they should be aware of that might impede future home value growth?
- The marketability of the home – that is how easy would it be to sell it (if they needed to) once the homeowners passed away?
Like anything, there is good news and bad news about this:
The good news? This is the only upfront cost you actually have to pay (by cash or credit card).
The bad news? This cost is payable even if you later decide not to take out the mortgage. Unfortunately, there are no refunds on this.
What my suggestion would be is that if you have paid for an appraisal, but no longer wish to pursue this, that you try to use it to secure a ‘regular’ mortgage or Home Equity Line Of Credit – usually either of these will need an appraisal anyway (especially if you are refinancing).
2. Costs You Have To Pay But That Are Deducted From The Amount Borrowed
These costs – rather than being upfront costs that you have to pay out of your own pocket – can be deducted from the amount that you receive.
So lets say you arrange a reverse mortgage for $150,000 and these costs are $2,000. Then you will receive $148,000 instead.
You can choose to pay them if you like but almost every single person chooses to have them deducted from the amount borrowed instead.
These are split between two different sets of legal costs:
a. Independent legal advice: $450-700
There are two aspects to legal fees that you are looking at:
- Legally registering the mortgage on title. We will come to this in part b.
- Independent legal advice – unlike the above element, this is a requirement of the lender and is a very important one. It ensures that you don’t sign anything or feel like you were ‘pushed’ into this product without consulting an independent legal expert.
Like appraisals, legal fees vary across Canada and from lawyer to lawyer. While $450 to $700 covers all ranges, generally they are around $600.
Remember: you don’t actually pay these upfront though – they are deducted from the amount you borrow.
b. Legal, administrative and set-up costs: $1,795
These are with regards to the legal cost of registering of the mortgage on title – including all other lender, administrative and other fees. Note this fee was recently increased to $1,795, in March 2018.
Every single mortgage in the whole of Canada incurs a similar cost to this.
It is unavoidable – part of our mortgage laws. Whether you are getting a Home Equity Line Of Credit (HELOC), ‘normal’ mortgage or reverse mortgage – you must pay a lawyer to register the mortgage on title – regardless of what type of mortgage you are getting.
A lot of people forget when they first bought a home that they incurred these costs and had to involve a mortgage lawyer – as a reverse mortgage is still technically a mortgage, a lawyer must be involved to place the mortgage on title.
Again – like independent legal advice – these costs are deducted from the amount that you receive.
The CHIP Reverse Mortgage In Canada
All of the advice in this article relates to the CHIP reverse mortgage – if you are unsure about what this is then I suggest you read our free guidebook (get your copy here) – it outlines everything you need to know about this mortgage loan.
In Summary – Reverse Mortgage Costs And Fees
That is it – there are no other fees or costs involved in setting up a reverse mortgage in Canada.
While the amounts can vary (it is really hard to predict what appraisals or lawyers will cost as they vary widely from province to province, city to city and lawyer to lawyer) – these are all the costs at this point in time.
And remember, in terms of upfront costs that you actually have to pay in cash (or by credit card) you are only talking around $150-400.
Here is a short table to summarize the costs/fees:
Reverse Mortgage Costs - Summary Table
|Upfront costs - must be paid by cash or credit card:|
Costs that must be paid but are deducted from the loan amount:
|a. Independent legal advice||$450-700||$600|
|b. Legal title registration and administrative fees||$1,795||$1,795|
Total - costs you pay out of pocket
|Total - maximum possible costs||$2,395-$2,895||$2,695|
What About Rates?
Yes, of course the interest rates are also a part of the reverse mortgage costs – even though you don’t actually pay these. This is covered in detail on our article – which also includes the latest rates – at https://www.reversemortgagepros.ca/rates-and-penalties/.
Alternatives To A Reverse Mortgage
It should also be noted that costs and fees for setting up this are very similar to the alternatives out there. For more on this, see this article we wrote:
Reverse Mortgage vs Home Equity Line Of Credit
Most people are usually considering a Home Equity Line Of Credit – which comes with almost identical set-up costs (minus the administrative fee – although some lenders do charge set-up fees). See our article comparing this to a HELOC for more on this:
As always, if you have any questions regarding reverse mortgage costs and fees then feel free to leave a comment below.