Reverse Mortgage Interest – Fixed vs Variable & 1 To 5 Year Terms Explained
If you’re confused about fixed vs variable reverse mortgage rates and how terms work (which are usually 1 year, 2 year, 3 year or 5 year), then this is the article for you.
Whether you’re looking at a CHIP reverse mortgage or another reverse mortgage product – you’ll get the info you need in this article to help you understand interest rates, how they work and how terms work with a reverse mortgage.
You can watch the video below – or read the all the detail in the article below the video:
Interest Rates Overview
Firstly, it’s important to note that reverse mortgage interest rates work the same as almost every other mortgage in Canada.
You’ll probably see me repeat that a few times throughout this article!
There is no trickery or nothing fancy, this is the same mortgage rules and procedures every mortgage in Canada has.
The only major different with a reverse mortgage is that there is no amortization.
Amortization is the process of paying off a loan over time through regular payments, typically on a monthly basis. With a traditional mortgage, the borrower’s monthly payments go towards both the principal (the amount borrowed) and the interest (the cost of borrowing the money). Over time, the balance of the loan decreases until it is paid off in full.
With a reverse mortgage, however, the borrower does not make any monthly payments. Instead, the interest on the loan accrues over time and is added to the balance of the loan. So there is no amortization.
Other than this, there are two components to the interest rate:
- Whether it’s a fixed or variable rate
- The term that you lock the rate in for (which can be 6 months through to 5 years)
I’ll discuss both of these in detail below. If you’d like to see what the actual rates, are, make sure and check out our reverse mortgages rates page.
1 To 5 Year Terms Explained
The interest rate is set over a ‘term’ (usually 1 to 5 years) and within that term the rate can be fixed or variable.
The most common and popular choice of term for any mortgage in Canada is a 5 year fixed rate term.
Reverse mortgages are no different – this is the most common and popular choice for these too.
Once the term is up, you then need to negotiate a new term and rate with the lender. You can also choose at this point (something that is fairly common) to move your mortgage to a different lender, if they’re able to give you better options.
This means that every 1-5 years you’ll negotiate a new rate for your reverse mortgage (which could be higher or lower than the rate you initially took).
Again, all of this is exactly how every mortgage in Canada works.
Fixed vs Variable Interest Rates
Another important factor to consider with a reverse mortgage is the interest rate type. There are two types of interest rates: fixed rate and variable rate.
- A fixed rate is a set interest rate that does not change throughout the term (1 to 5 years – per the above section) you choose.
- A variable rate, on the other hand, can change over time based on the Bank of Canada central rates.
The choice of which you want is yours.
Most people choose a fixed rate because they want to lock in the interest rate and not have any uncertainty or worry about future interest rate changes.
Again – this is exactly how every mortgage in Canada works.
Important Consumer Protection
In Canada, the interest rates on reverse mortgages are subject to regulation and oversight by federal and provincial bodies. These regulations and guidelines are designed to ensure that lenders operate fairly and transparently, and that borrowers are protected from unreasonable or predatory lending practices.
One of the primary regulations governing reverse mortgages in Canada is the federal Interest Act. This law requires that lenders provide borrowers with clear and transparent information about the interest rates, fees, and terms of the mortgage before the borrower signs the contract.
Additionally, the Financial Consumer Agency of Canada (FCAC) is a federal government agency responsible for overseeing financial institutions and protecting consumers. The FCAC provides guidance to borrowers on how to understand and compare different types of mortgages, including reverse mortgages. They also have the authority to investigate complaints and take action against lenders who violate regulations.
Provincial regulatory bodies, such as the Financial Services Regulatory Authority (FSRA) in Ontario, also play a role in regulating the reverse mortgage industry. These bodies have the power to license and oversee lenders, conduct investigations, and enforce regulations.
These protections ensure that lenders can’t take advantage of you and charge exorbitant rates.
Real Life Example – Beginning Of A Reverse Mortgage
You are taking out a reverse mortgage and you look at all the term options (5 year variable, 1/2/3/5 year fixed) and choose to take a fixed rate on a 5 year term (the most popular choice).
For the first 5 years of the reverse mortgage, interest will be added to balance owed at the agreed (fixed) rate and can’t be changed during these 5 years (ever).
The only way this rate could change would be if you chose a variable rate – then interest may change as the Bank of Canada changes their rates (up or down).
But remember: mortgages work on 1-5 year terms, so this means at the end of the 5 year there will be a ‘renewal’ of your reverse mortgage.
Real Life Example – At Renewal
5 years have now passed – you now have to renew your interest term, as it has expired.
What happens is that the same term options (5 year variable, 1/2/3/5 year fixed) will be available and offered to you for renewal for your new term.
Alternatively, you can look at other lenders and see what other rates they have available to refinance your reverse mortgage.
Whatever you choose now sets the rate for the new time period you picked and the cycle repeats itself over again.
Every 1-5 years you’ll go through this process to renew your rate. Until the reverse mortgage ends – make sure and see our article on ending a reverse mortgage for more on that.
It’s worth noting that there are no new fees (legal or admin or setup or anything like that) at renewal.
And once again – this is how every mortgage in Canada works.
Summary – Reverse Mortgage Interest – Fixed vs Variable & 1-5 Year Terms
Reverse mortgage terms and interest rates work largely the same as every other mortgage in Canada.
You’ll choose either a fixed or variable rate and then have to make the decision again every 1-5 years.
Rates can go up or down over time – your reverse mortgage will likely move with them. What this means is that the rate you’re being offered today is one factor and isn’t actually that important in the long run.
When taking a reverse mortgage out, you should consider and factor in that rates will fluctuate over time and that this is medium to long term loan.
Sometimes you’ll actually end up getting lower rates than those you initially received, sometimes a little higher. Ultimately the product is still designed to ensure you have home equity left – that’s what really matters (more than the rate).
Get A Free Reverse Mortgage Assessment In 90 Seconds
You can get a free reverse mortgage assessment – from a Chartered Accountant – who’ll then advise you if this is a good solution for you, or if something better works.
All it takes is 90 seconds – click here to get started.
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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