In this article we thought we would outline the real pros and cons of a reverse mortgage.
Like any financial decision, there are both advantages and disadvantages that need to be considered.
As the leading specialists in Canada, we believe in objectively showing you both the advantages and the disadvantages of a reverse mortgage – so you can rest assured that the decision is absolutely the best one for you.
You want to make your decision while being informed and educated about all the facts.
So in this latest article, we’d like to take a look at both the major pros and the cons of a reverse mortgage in Canada.
But What Exactly Is A CHIP Reverse Mortgage?
If this is your first time reading about this kind of mortgage, I strongly suggest you
click here to learn more if you have not already downloaded our free guidebook – in that you’ll learn everything you need to know about reverse mortgages in Canada.
PROS:
1. You Own Your Home For Life. Period. No Exceptions.
By far the biggest advantage of this mortgage product is that it allows you to get money out of your home with absolutely zero risk that you’ll ever lose ownership of your home.
This product – unlike what some people believe – is designed to keep you in your home for life.
Unlike a ‘normal’ mortgage, home equity loan or a home equity line of credit – you are guaranteed to keep ownership of your home for life and the lender cannot take it away for any reason whatsoever. This is actually written into the legal agreement in black and white.
This is because no repayments are required – failing to make repayments is the major reason that mortgage or home equity lenders risk losing their home.
2. Freedom And Flexibility
Increasingly in Canada, the majority of savings one has upon
retirement are tied up in property.
The money you take out can be spent on anything you like – you have the complete freedom and flexibility to decide. You’ve worked hard your entire life – now is the time to reap the benefits, live worry-free and free of debts or stress.
You don’t have to make any payments (although you can voluntarily make some if you like!) and there are no rules or requirements on how you spend the money. This is as it should be – you invested into your home over the years and you should now reap the benefits – turning it into a ‘home pension’ by taking out a reverse mortgage is one way to do this.
3. 100% Tax Free
The money you receive – regardless of how you choose to receive it – is tax-free since it is technically a loan and not income.
Unlike pension withdrawals or other forms of retirement funds, it is not taxed at all. Not one penny.
4. No Re-Payments Required
The whole purpose of this loan is financial freedom – not loading you with more debts that you need to worry about paying!
Through conservative lending and not lending over a certain value of your home (55% maximum), it is possible to maintain the equity in your home without requiring you to make any repayments – home valuation growth can offset the loss of equity instead.
5. Safety If The Housing Market Declines
Even if there was a massive housing crash, you will never owe more than what your house is worth at sale – guaranteed. Even when things such as Brexit occur, we are there to help you.
This is written into the contract. So you are protected against any future potential housing shocks. You don’t need to worry about what’s going to happen with the housing market in Canada.
And, best of all, 99% of reverse mortgages in Canada have equity remaining when the mortgage is removed. The other 1% is capped to what the home is worth – it can never be above this.
So you also don’t need to worry about leaving a bill behind for your family.
DISADVANTAGES OF A REVERSE MORTGAGE:
1. Interest Rates
The amount you receive is still liable to interest. Although you will never have to make any re-payments, this could reduce the equity in your home over time – but only if interest rates are more than double your property value appreciation.
Interest rates are almost always higher than a ‘normal’ mortgage or Home Equity Line Of Credit (HELOC) but lower than a Line Of Credit (unsecured), Car Loan, Loan or Credit Card rate by quite a bit.
The rates are low enough that growth in your home price should offset the interest – or in many cases just now, you can actually still see your home equity grow – even with a reverse mortgage on your home.
However, you need to factor this in and decide if the rate is worth paying for all the features and benefits (listed above). For more on this, see our article on interest rates and penalties:
2. Moving Home Is Harder
The whole purpose of this product is to help you stay in your home.
So if you were thinking about maybe moving to another residence in future, it’s a little more difficult as you’d have to close out the mortgage first.
Of course you can just pay off the mortgage with the proceeds from the sale of your home (as we noted above, you can never owe more than what your home is worth at sale). However, it does add a little more complexity to the decision to move home.
It should be noted that the same applies to any type of mortgage or loan secured on your home. A ‘normal’ mortgage or Home Equity Line Of Credit would have the exact same disadvantage.
3. You Might Not Be Eligible
While you do not need good income or an excellent credit score – which you would need for most mortgage products, there are some restrictions on eligibility.
All property owners listed on title must be over 55 and your age(s) will determine how much money you are eligible for – in general, the closer you are to 55 the less you are eligible for.
This is because of how conservative the lending is. If they were not as conservative, people would see their home equity being eaten up – so these rules are put in place to protect you and your home equity.
Furthermore, this product is only available on your primary residence – not any vacation or mobile homes.
4. Reduction Of Your Estate Size For Inheritance
Of course one of the disadvantages of a reverse mortgage (depending on your outlook) is that you are reducing the estate size available to your relatives for inheritance. For this reason, you might consider speaking to any relatives or family members during the process of applying to ensure they are happy with everything.
The other thing to note is that you are only reducing your estate size if you actually use the all the money.
Of course, if you don’t actually use the money then your estate size stays the same – you have just moved some of the value of your estate out of your home and into your bank account – it is still in your estate just in a different format.
The actual impact on your estate size will then depend on how much of the money you use and the growth in your home prices vs the interest rate. Some people (many people in Canada just now) are actually seeing their estate size increasing despite having a reverse mortgage on their property – this is because home price appreciation is offsetting both the interest rate and money being spent.
It would definitely not be prudent to rely on this happening though and factor in a reduction in estate size to your decision.
In Summary
I hope the article above helps you decide if this is a great fit for you.
Sometimes you will have heard other rumours or ‘facts’ about the disadvantages of a reverse mortgage in Canada – mainly this is people confusing them with the American version of the product.
If you want more information, feel free to leave a comment below.
The above information represents the real and true pros and cons of a reverse mortgage – if you have any other questions or concerns then feel free to leave a comment below and we’ll respond in due course.
Please send info to the about e-mail. Thank youClaudette Linchet
Hi Claudette
I have emailed you our free reverse mortgage guide – you can also download it at: https://www.reversemortgagepros.ca/reverse-mortgage/
Thanks,
Mich
What maintenance and upkeep and taxes is the home owner responsible for? Al Stacey
Hi Al
Maintenance and upkeep is solely up to you as the home owner – there are no rules with regards to this.
However, you are still responsible for property taxes and also keeping up any home insurance.
Hope this helps.
Thanks,
Mich
i have a secured line of credit i was told i would have to get rid of it on the the title before i could even think of applying im not to kean on that idea.
Hi Zaine
That information is correct, but you can use the reverse mortgage funds to pay it off. For example, let’s say you qualify for a reverse mortgage of $50,000 and your secured loan is $10,000. You would pay the $10,000 off first then keep the remaining $40,000.
Thanks,
Mich
Basically you are going to receive lets say, our $500,000 house and your only going to pay $200,000 or less. You are not nearly telling people the worst things that can happen! Interest rates have to be renegotiated every 5 years or less. You charge much higher rates than a normal mortgage. If they spike they will lose their whole equity in a very short time. You need to publish some examples of what can happen.
Hi Gregg
Thanks for your comment. I would say that it’s impossible to address all aspects of this product in one article, without making it over 10,000 words and way too long! What you are talking about (interest rates being charged and the impact on equity) I address in the following article (including giving examples): https://www.reversemortgagepros.ca/rates-and-penalties/.
If you are worried about rates spiking, you can fix your rate. And yes, you do have to reconsider the rate every 5 years – but this is the same with almost any mortgage product or any product tied to a home loan. The vast majority of Canadians take out 5 year, fixed rate mortgages – this is the same as what is offered with a reverse mortgage.
Finally, I would suggest you read my other article and consider the balance of home equity vs interest rates – when considering what can happen. Most people do not consider the balancing impact of house price increases. If you don’t believe me, here are the official statistics: 99% of seniors in Canada with a reverse mortgage on the property had equity remaining on that property when the reverse mortgage was discharged. That’s 99% over a 30 year+ time period. In addition to this, 50% of them had more than 50% equity remaining.
I hope this helps – I am probably going to publish a ‘reverse mortgage calculator’ so you can see for yourself what happens to your home equity under a reverse mortgage – if you shoot an email to me, I can email you an Excel copy.
Thanks,
Mich
thank you for your info can you send me a telephone number so we can reach you
Hi There
You can call us directly (toll-free) at 1-888-358-7771. Alternatively, if you fill out our simple and easy ’90 second’ online assessment form, we can take a look at your circumstances and advise you as to which mortgage product is the best fit for you – https://www.reversemortgagepros.ca/apply-now/
Thanks,
Mich
Is there a penalty for trying to discharge the “loan” before 5 years?
Hi Gerry
Yes, like every single mortgage product out there, there is a penalty for discharge before 5 years. If you head over to the following article you’ll find everything you need to know regarding reverse mortgage penalties: https://www.reversemortgagepros.ca/rates-and-penalties/
Thanks,
Mich
Why do the banks not deal with reverse mortgages ?
How is a regular mortgage discharged from a bank to receive a reverse mortgage?
Hi Mary
Good question – I would assume you mean the ‘Big 5 Banks’ (RBC, CIBC, BMO, Scotiabank or TD) – HomEquity Bank who provide the reverse mortgage are actually a Schedule A bank themselves! Unfortunately I don’t know the answer but I would guess (just my personal view) that the reason they do not deal with reverse mortgages is that it is a very specialist product. So it would require extensive education of their employees and bringing in some additional resources to support it. On top of this, the upfront costs are high and you potentially won’t see any of your money for a while (since there are no monthly payments, like a traditional mortgage) – so for these reasons they have decided not to offer them.
A regular mortgage is discharged in the same way it would be if you were to change your mortgage provider to any other lender. You would inform them that you intend to discharge the mortgage, you may have to pay any costs or fees (this depends on the lender) and the legal charge would be removed from title. The lawyer handling the reverse mortgage would take care of all of this – it is included in the costs and fees of a reverse mortgage that I outlined here: https://www.reversemortgagepros.ca/costs-and-fees/
Thanks,
Mich
Is it permitted to rent out your home while holding a reverse mortgage?
Hi There
Firstly, the residence must be your principal residence. There is no getting around that. You could not rent it out and live somewhere else. This is the same for all mortgages, which usually have a clause in them requiring it to be your principal residence – as there are different rates for mortgages that are not a principal residence.
However, if you lived there for 6 months and were ‘snow birds’ the other 6 months (renting it out) I do not see a problem with this – as it is still technically your principal residence.
Another example would be that if you owned a cottage you can designate it to or your home to be your principal residence. However, you couldn’t designate one to be your principal residence and then rent that place out!
What I would suggest doing is disclosing this and being upfront in your application, so as not to create an issues down the line.
Hope this helps.
Thanks,
Mich
Please email me a reverse mortgage calculator when available. Thank you.
Hi Irene,
Unfortunately we are unable to email you a reverse mortgage calculator, but we would be happy to provide you with a free quote to show you how much you potentially qualify for. You can either fill out an app on our website: https://www.reversemortgagepros.ca/apply-now/ or call us directly, toll-free at 1-888-358-7771 and an agent will be happy to help you.
Thanks,
Mich
I have $100,000 remaining on my mortgage. Do I qualify for a reverse mortgage and if so, must I use the funds obtained from the reverse mortgage to pay off the existing mortgage?
Hi Roy
Yes you can qualify for a reverse mortgage with an existing mortgage on the property. However, the existing mortgage would need to be paid in full first from the reverse mortgage funds and you would be left with anything that is remaining. I think you will find this article on our website useful: https://www.reversemortgagepros.ca/top-8-misconceptions/
Thanks,
Mich
Can a reverse mortgage be in both owners names, so when one person passes, the other can still stay in the house?
Once the owner passes, when does the property have to go on the market?
Hi Nancy
Not only can a reverse mortgage be in both owners names, but it must be in both owners names for this exact reason. In the U.S. this would happen a lot – the owner passes away leaving the remaining person to sell – but in Canada this rule was created to stop this happening.
So, a reverse mortgage must be in both owners names (meaning both must qualify for it – be over 55) and when one passes away the other can still live in the home for the rest of their life as well – with absolutely no change to the reverse mortgage at all.
Hope this helps.
Thanks,
Mich
I have a relative who wants to do a reverse mortgage with his apartment, which he owns, but he is over $200,000 in debt on a line of credit….would this be a wise choice?
Hi Jeanette
It really depends, I’d have to get more information. If this is a personal line of credit (i.e. unsecured) then the interest rate will be higher than a reverse mortgage and this would be an easy choice; if this is a Home Equity Line of Credit and they are comfortably managing the payments, then it might not be the best option.
Really, it comes down to cash flow and freeing up more cash. If they are comfortable with their financial position, then there is no need to change it. A reverse mortgage is best suited as a financial top-up or help for people who are struggling financially or have something they specifically need the money for.
Thanks,
Mich
my property worth around 850000 and I have a mortgage of around 229000 and home equity loan of around 110000,i am 64 years old how much cash would I get from reverse mortgage?
Hi Jeff
It would depend on the property type and location, in addition to the information you gave me. Based on my experience, the amount of reverse mortgage you qualify for should be close to enough to cover the $339,000 you’d need to pay off the mortgage and HELOC – but it would really depend on property type and location.
Thanks,
Mich
What happens if the amount of equity you have goes above the amount qualified for because of interest , let’s say we are on a fixed income and no longer qualify to get that amount as a mortgage?
Hi Linda
I am not quite sure what you mean. If the reverse mortgage balance increases, there are no repercussions – you don’t need to constantly re-qualify every year or anything like this – once it’s on there, you never have to worry about it again.
In addition to this, the amount you own is capped to the value of the home – you can never owe more than your home is worth. This is because a reverse mortgage is a ‘non recourse’ mortgage.
Hope this helps.
Thanks,
Mich
Do you do reverse mortgages on mobile homes
Hi Darlene
Yes, you can get a reverse mortgage on a mobile home. However, the value of the home must be above $100,000 and the minimum reverse mortgage is $25,000.
Thanks,
Mich
I’m trying to make sense of this. Say I owe 360k on my mortgage and my house can sell for 1.1M that leaves me with 740k equity. 55% of that would qualify me for 407k if I meet all requirements for full amount. If I pay off my mortgage, I’m left with 47k. Do I start paying the higher interest rates from this type of mortgage immediately on the 360K I used to pay off my mortgage?
Hi Wally
Actually – if you qualified for 55% – you’d qualify it on 55% of your total house value, not your equity. So 55% x $1.1m = $605k.
The interest would depend on how much you took from this $605k.
You’d have to take a minimum of $360k – to pay off your existing mortgage. Interest would then immediately apply to this amount. After this, it would only apply to any additional amounts (up to the $605k) that you withdrew. It only applies at the point of withdrawal too. So you could pay off the $360k mortgage and not take any other cash, if you wanted to.
Hope this helps.
Thanks,
Mich
i would be most interested in receiving a reverse mortgage calculator.
It appears the key issue is the interest rate difference between a reverse & traditional mortgage ?
thanks
Hi Dan
Yes, that is one of the key issues to think about. A better way of putting it is that all the benefits of a reverse mortgage (no monthly payments, easier to qualify for etc.) are what you get in return for paying a higher interest rate than on a traditional mortgage.
Thanks,
Mich
Do I have to pay off a current regular mortgage I have wiith a CHIP mortgage?
Hi Ruth
Yes, you have to pay off any existing mortgages. So let’s say you have a $100,000 mortgage and are able to get $150,000 from a reverse mortgage. In this case, $100,000 would be used to pay off your existing mortgage and you’d be able to keep the additional $50,000. Of course, you also now have the advantage that you don’t have monthly mortgage payments to make – so freeing up cash flow is an important consideration.
Thanks,
Mich
I have a reverse Mortgage and I was just mailed my 2017 annual statement which has a line stating that my Maximum Interest Deductible for 2017 is $2842.13. Can I claim this amount as a deduction for my 2017 Return?
Hi Guy
You could not deduct this unless you could prove that you used the money for the reverse mortgage for business/income. For example, if you invested the money then you’d be able to claim this as a deduction against your investment income.
Otherwise, you cannot deduct this unless you used the funds to actually generate some of your income.
Thanks,
Mich
Is there a lender or broker fee involved? I understand there are appraisal fees, legal fees and title insurance.
If the home owner passes away, is there a time limit that the reverse mortgage needs to be paid out by or will the bank wait for probate and the sale of the home?
Hi Barb
The lender may charge a fee but it is added to the mortgage – you can see all the costs and fees in detail at: https://www.reversemortgagepros.ca/costs-and-fees/.
After all home owners have passed away, the bank will usually communicate with the Estate lawyers to plan next steps. Sometimes someone inheriting the house may wish to keep it, so they are given time to obtain a new mortgage to pay off the reverse mortgage. The whole process usually takes around 6 months.
Thanks,
Mich
Mich! It is important to know if the lender charges a fee as these can be quite substantial. As there is only one lender who deals in reverse mortgages in Ontario, this should be an easy question to answer. “May” is not good enough!
Hi Barb
The answer is at the link I provided – with an outline of all fees charged by the main reverse mortgage lender in Canada (HomEquity Bank) – https://www.reversemortgagepros.ca/costs-and-fees/.
The reason why I use the word ‘may’ is that the this fee isn’t (at present) technically a lender fee – but meant to cover the legal costs too. This amount may decrease or increase over time – or change in nature – if I respond with exact information in a comment, I have to then remember to come back and find every single comment where I’ve addressed this – which would be very time consuming! So it’s much better if I outline all the current costs and fees in one article and keep that up to date 😉
So it’s better for me when replying to individual comments to not be completely specific and link to the most up to date information.
Hope this makes sense.
Thanks,
Mich
Mich! Your costs sheet states the legal, admin and set up fee is $1750. I contacted Home Equity bank CHIP program directly and they advise that the one time admin fee is $1795 and legals are extra. They also said any lender and broker fees would be paid at their end. You can see why I am confused! I’m not interested in hidden fees!
Hi Barb
I guess they must have put it up very recently – I will check and confirm but $45 should not make a difference to your decision, I’d hope – especially since this is not out of pocket.
The legal fees they are talking about are included in the list on the page I sent you (https://www.reversemortgagepros.ca/costs-and-fees/) – see the section on ‘Independent Legal Advice’.
These are all the costs and fees, even if the admin fee has changed by $45 – which I will confirm.
Thanks,
Mich
If owner ended up in a long term care facilities would they have to sell there house or could they keep it in hope of going back home some day ??
Hi Rick
There is no obligation to sell your home ever. In addition to this, if you are breaking a reverse mortgage to move into a long term care facility, the penalty is reduced by 50%.
Thanks,
Mich
A reverse mortgage is approved for 2 people on a joint (husband and wife) owned property and after several years one spouse moves out of the residence and move to a different residence. The other spouse (who remains in the residence) does not want to leave the residence. Can the spouse who remains be forced to leave or sell agree the residence as the spouse who has left wants their 1/2 share of the sale of the residence after the residence is sold and the reverse mortgage is paid off?
Hi Barry
This question is a little tricky, as family law comes into play. There is no way to force a sale.
However, if the spouse who left wanted removed from the mortgage you’d have to ‘refinance’ your reverse mortgage (in the same way you’d have to any other mortgage, under these circumstances) to remove them from it.
In your situation, I would mention this scenario to the independent legal adviser (who you’re required to consult) before taking out a reverse mortgage. For example, if the spouse wanted their half then lawyers would have to be involved and family law comes into play to determine what they are entitled to. The courts could force a sale – but the bank (lender) cannot. I am not a lawyer though, so please don’t take this advice as absolute!
Hope this helps.
Mich
Can you pay the interest on a monthly basis if your approved
Hi Louise
Yes, you can pay the interest each month. The difference is that this payment is voluntary and you’re not forced to make it.
Thanks,
Mich
I had my home appraised by a certified appraiser – do I have to do this again ??
Hi Marrianne
It depends if the appraiser is one that the lender approves of. If they are, then you are ok.
Lenders have lists of appraisers that they have approved – they do this to protect themselves. The reason is that there have been cases where someone got their buddy – who was a licensed appraiser – to do the appraisal and they want to avoid this kind of thing happening.
Thanks,
Mich
If one has a reverse mortgage in place, can they still use the deferral program for payment of house taxes, or does this break the contract?
Hi Jennifer
Are you based in BC or Alberta? Both these provinces have deferred property tax rules that differ slightly.
For BC, yes you can still use the deferral program. However, you would need to get the property taxes paid up to date at the time of funding the reverse mortgage – then go back on to the deferred taxes list. You should also contact your particular city ensure it’s fine for them to do so, but from the lenders perspective it is fine.
For Alberta, unfortunately not. Once you get the property taxes back up to date, the Province won’t let you go back on the deferred taxes list. That’s a Provincial wide rule that there isn’t much the lender can do anything about.
Hope this helps!
Thanks,
Mich