What Happens When A Reverse Mortgage Ends?
A commonly asked question I get is ‘What happens at the end of a reverse mortgage?’
It makes sense – it can be worrying to not know what you’re leaving behind and how things will be handled.
Another regular question is ‘how do lenders make money on a reverse mortgage if there are no payments?’
Both of these issues will also be explained in this article – as it’s when a reverse mortgage is eventually paid off that the lenders make their money – and I’ll walk you through exactly what happens when a reverse mortgage ends, so that you know what you’re leaving behind.
There are also other ways you can voluntarily choose to end a reverse mortgage that I’ll explore as well…
You can see this in video form on the video below or read the full article in detail below.
Before I Get Started – Are You New To Reverse Mortgages?
If you’re new to reverse mortgages, make sure and check out this article and free guide which explains how they work in detail – simply check out our free guide on the CHIP mortgage and more.
Balance Payable At The End
The entire reverse mortgage balance (capital plus interest accrued) is paid when the reverse mortgage ends.
This the point where lenders make their money on the loan – instead of being paid monthly (like a regular mortgage), they are paid everything in one go.
It’s worth remembering that you can’t ever owe more than your home is worth – the amount owed is capped to the value of your home.
And over 99% of Canadians have had equity left in their homes when a reverse mortgage has been ended. For more than this, make sure and check out this article on 8 misconceptions about reverse mortgages.
Penalties For Ending A Reverse Mortgage
It’s also worth quickly reviewing penalties for ending a reverse mortgage, before I get into the detail on what happens when a reverse mortgage ends.
Any penalties that are applicable would be added on to the balance owed.
I’ve written a detailed article on how reverse mortgage penalties work on our reverse mortgage rates page. But in summary:
- There are no penalties where all homeowners pass away. This is the situation for the majority of Canadians who take out a reverse mortgage.
- There’s a 50% reduction in penalties where homeowners have to move to a care home.
- Otherwise, penalties are payable – the penalties are much higher in first 3 years but considerably lower after this and almost zero beyond 10 years.
The 3 Ways A Reverse Mortgage Can End
In short, there are 3 ways in which a reverse mortgage can end:
- All homeowners/spouses move out and it’s no longer their principal residence.
- You choose to end the reverse mortgage by either selling your home or paying it off.
- All homeowners/spouses pass away.
I’ll go through each of these in detail below – but I want to spend the most time on number (3) as this is what applies to most Canadians who are considering taking out a reverse mortgage – they want to live in their home for the rest of their lives.
An important point – that you’ll see repeated throughout this article: the way a reverse mortgage is treated is almost exactly the same as any other mortgage in Canada – there aren’t any special rules or hidden fees that apply to a reverse mortgage.
So that’s something to keep in mind – there is nothing sneaky or suspicious going on here, it’s just how all mortgages are dealt with in Canada…
1. Moving Out
When it comes to moving out, the most common scenario is moving to a retirement home or care home.
In this situation, you’ll often consider selling the home as you likely won’t want to keep up property taxes and insurance on a home you’re not using.
Even if you don’t sell the home, technically you are required to inform the lender – although some folks choose not to do this.
2. Selling Your Home Or Paying Off The Mortgage
If you decide to sell your home, this is another point at which the reverse mortgage ends.
You could also remortgage (take out a new mortgage with a different bank or lender) or use any money you have (if you come into money or have other assets) to pay off the reverse mortgage too.
The reverse mortgage would be paid off just like any other mortgage in both these scenarios.
3. All Homeowners/Spouses Pass Away
This is the most common way a reverse mortgage ends in Canada.
In this situation, your Estate ‘takes over’ the reverse mortgage as well as the title to the home. The Executor of the Estate will pass down the title to the home to your heirs, as dictated in your will.
One important point is that the mortgage is not really inherited – in fact, no mortgage can be inherited in Canada.
So the Estate and Heirs must pay off the mortgage – again this is the same as any other mortgage in Canada on a home that is being passed down.
Your Estate will have around 180 days to inform the lender what they intend to do – I’ll discuss this in more detail below.
Another key point is that title goes down to your Estate not the lender.
At no point (ever) does the lender own your home. It remains the property of you and your Estate (once you pass away) at all times.
What Options Does Your Estate Have?
Like any other mortgage that comes into the hands of an Estate, there are 3 options:
- Sell the home – use the funds to pay off the reverse mortgage.
- Pay off the reverse mortgage with other funds (e.g. life insurance, other Estate proceeds, selling other assets in the Estate) and keep the home.
- The Heirs can refinance or remortgage the home to pay off the reverse mortgage and keep it.
Timelines For Your Estate
There is a ‘160 day’ or ‘180 day’ rule written in some reverse mortgage agreements. Some of them don’t have any specific rules.
In reality, this is not enforceable in court – the Estate simply has to take ‘reasonable’ actions and they can go over this 160/180 day limit without any issues at all.
‘Reasonable actions’ simply means that the Estate has to do something – they can’t just leave the home sitting there and do nothing.
So, if it takes 200 days to sell the home or settle the reverse mortgage balance that is perfectly fine – there is nothing the lender can do.
But if 200 days have passed and the Estate tells the lender they haven’t even started the process or done anything at all to pay them back then at that point the lender might consider their legal options.
The only reason this exists in the contract is that there has to be some timeline – otherwise Estates could just sit on homes forever and lenders would never be paid back!
But it’s important to know many, many folks have taken more than 180 days and it isn’t a problem. In fact, I’d say it’s probably more common to take more than 180 days than it is to take less than that!
As long as the Estate is doing something and is keeping the lender informed as to what’s going on, there will never be an issue.
There has not been a single legal case in Canada that I know of where the lender of a reverse mortgage has taken an Estate to court over this rule – because almost all the time the Estate is actually doing something and trying to pay them back (it’s just being naturally delayed).
Summary – What Happens When A Reverse Mortgage Ends
There are a few ways a reverse mortgage can end:
- Moving out – so the home is no longer your principal residence.
- Selling the home.
- Remortgaging or voluntarily paying off the mortgage with other funds.
- The homeowners passing away.
When a reverse mortgage ends, the process is almost identical as with any other mortgage in Canada.
Reverse mortgages – like all other mortgages – can’t be inherited. So, the Estate and Heirs will resolve the mortgage through selling the home, remortgaging or paying it off.
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.
June 3, 2023
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