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 up a reverse mortgage.
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 costs for a reverse mortgage are to split them between costs that must be paid upfront (by you) and costs that deducted from the reverse mortgage loan upon completion (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 for a reverse mortgage?
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 of a reverse mortgage 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 a reverse mortgage 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 go with the reverse 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 a reverse mortgage, 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 Reverse Mortgage Loan
These costs – rather than being upfront costs that you have to pay out of your own pocket – can be deducted from the reverse mortgage loan 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 added to the reverse mortgage balance 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 getting with a reverse mortgage:
- 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 reverse mortgage 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 reverse mortgage balance.
b. Legal, administrative and set-up costs: $1,495
These are with regards to the legal cost of registering of the mortgage on title.
Every single mortgage in the whole of Canada incurs this cost.
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 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 reverse mortgage proceeds that you receive.
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:
It should also be noted that costs and fees for setting up this are very similar to the alternatives to a reverse mortgage.
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 reverse mortgage vs home equity line of credit 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.