Reverse Mortgage Rates And Penalties

Reverse mortgage rates and ‘what are your rates’ are very common questions that we get here on Reverse Mortgage Pros.

The problem is that rates are particular to an individual.

This is actually also the case for ‘normal’ mortgages – just that most people don’t know this and many sites play a ‘bait and switch‘ type game by advertising really low rates for you only then to find out that you ‘don’t qualify’ for that rate.

However, I would like to put some information out there regarding reverse mortgage rates.

I will also try to keep this regularly updated, so that the rates you see on this page are relatively accurate.

What Are Current Reverse Mortgage Rates

Currently reverse mortgage rates are at 5-6% .  As I mentioned above, the exact rate you get – as well as the amount you are eligible to borrow – will depend on several things:

  • Your age
  • The loan amount
  • The property location

So there is no exact reverse mortgage rate that can be quoted here.  However, they will not be too far off 5-6% and have been in this range for a while.

How Do These Rates Compare To Other Products?

Again, the rates of other mortgage products and loans are both constantly changing and depend on what an individual qualifies for (if you qualify for anything at all).

Just now you are looking at around 2.6-2.8% for a standard fixed rate mortgage (this is likely to go up soon though and will probably be around 3% by the end of the year), 3.5-4% (variable) for a Home Equity Line Of Credit, 7-8% (variable) for a Line Of Credit (unsecured), between 10-15% for a personal loan and higher than this for most credit cards.

Rather than focusing on the specific number, this simple chart shows how reverse mortgages compare to the other options out there:

Reverse Mortgage Rates Comparison Graphic

How Does This Impact Your Home Equity And Your Net Worth?

The first thing to note – which is something that a lot of people miss or don’t understand – is that both a mortgage and Home Equity Line Of Credit also reduce your net worth.

Many people ignore this fact because they don’t ‘see’ the reduction of their net worth – because the interest is buried into the monthly payment and is paid every month.  Because the interest doesn’t accumulate, they don’t ‘see’ the interest adding up and it is easy to think it isn’t there.

Here is an example – purely for illustrative purposes only and approximations – of what the differences would be on a $100,000 loan for 5 years:

$100k Loan Cost Example

What About Compounding Interest?

It is important to note that a reverse mortgage – like a normal mortgage – compounds semi-annually.  A HELOC, on the other hand, compounds monthly.

So the impact of a HELOC interest will be more as it is compounded more regularly.  This is very important to be aware of.

Of course, your home equity growth can offset this interest cost – I’ll examine this further below.

In the meantime, as you can see, the cost of a reverse mortgage is higher than a ‘top’ mortgage or HELOC – but much lower than other options out there.

The best way to think about this is that this additional interest is a price you pay to get access to all the features a reverse mortgage has than a HELOC or top mortgage do not – you don’t need to make any payments, you are guaranteed to live in your home for life and can never lose it and you don’t need income or a top credit score to qualify for it.

So the question you have to ask yourself is: are these features all worth it?

 

What About Your Home Equity?

Another huge misconception is that a reverse mortgage will eat away your home equity.  This is only true if your home does not grow in value at all.

Almost every home in Canada is growing in value just now and close to 100% have been growing in value in the past 5 years.

How much does it need to grow to offset the reverse mortgage cost?  As we mention in our ‘Reverse Mortgage Secrets‘ guide, a neat trick is that the approximate amount your home needs to grow is at half of the reverse mortgage rate.

This is because a reverse mortgage is taken out on up to 55% of your home.  Your home equity growth still compounds on 100% of your home.  So, because the reverse mortgage is roughly half the size, your home equity growth only needs to be around half of the reverse mortgage rate.

If you took out less than 55% of your home value, then your home equity growth can be less than half of the reverse mortgage rate and you will still see your home equity growing over time.

To continue our example from above, let’s say your home was worth $250,000 and you took out the $100,000 loan mentioned above. Here is what your home equity growth would be under various scenarios:

Home Equity Growth Examples
As you can see for this example – a $250,000 property and $100,000 reverse mortgage – your home would only need to grow a little more than 2% to offset all of the reverse mortgage interest (see the table above for the interest calculation).

And if your home were to grow above 2%, then you would actually gain home equity while having a reverse mortgage in this situation.

This might sound too good to be true, but many Canadians are in this position just now.  In fact, in the hottest areas of Canada, some owners have seen double digit home equity growth over the past 5 years!

 

What About Reverse Mortgage Penalties?

A few people ask us questions about this.  It is rare – because most people are taking out a reverse mortgage because they want to live in their home for life and never leave.

However, for some a reverse mortgage can be a short term solution.

The golden rule for reverse mortgage penalties is that if you are paying it off after 5 years, there is no penalty; beyond this the closer you are to 5 years, the lower the penalty will be.

This is actually very similar to the penalty structure of a ‘normal’ mortgage.  And, like with a ‘normal’ mortgage, you can also make what are called ‘prepayments‘.  However, again – like a ‘normal’ mortgage – you only get a certain allowance of these each year – in the case of a reverse mortgage that amount is 10% – meaning you can repay 10% of the balance without penalty every year.

Beyond this, here is how reverse mortgage penalties work:

Reverse Mortgage Penalty Calculation

Compared to ‘normal’ mortgages these are pretty similar.    In fact, I have seen some IRD calculations of the ‘big 5 banks’ come out with penalties more than 5% – and that’s in year 3 too.  For more on the penalty rates of ‘normal’ mortgages, I suggest you read this guide.

It is also worth noting that there is absolutely no penalty in the event of the owners passing away and if the reason why you are moving is to move to a nursing home, the penalty is reduced by 50%.

As I mentioned before, there are no penalties after 5 years and up to 10% of the balance can be paid off without penalty every year.

I would say that the first year penalty is on the high end – as far as mortgage penalties go – but beyond that, these penalties are in line with most mortgage products and actually on the lower end compared to the IRD of the big 5 banks fixed rate mortgage products.

 

In Summary – Reverse Mortgage Rates And Penalties

I have outlined how reverse mortgage rates and penalties work, including comparing them to the alternative options out there.

When it comes to interest rate, reverse mortgages are a better option than loans, line of credits (unsecured) and credit cards.  However, Home Equity Line Of Credits (HELOCs) and ‘normal’ mortgages generally have better rates.

So the key question you must ask: is it worth my paying a higher rate to have access to these 3 benefits that a HELOC or ‘normal’ mortgage do not have?  Namely:

  • No monthly payments
  • You can’t lose your home – ever – for not making payments (since there aren’t any)
  • You don’t need income and a great credit score to qualify

The answer to that question will vary from person to person – it is up to you.

Finally, I looked at reverse mortgage penalties and outlined how these work.  I would say that, in my opinion, these penalties are very reasonable and the fact that there is no penalty upon death or after 5 years – as well as a reduced penalty if you have to move to a nursing home – then these are definitely a positive feature of the reverse mortgage product, compared to others out there. For more on this check out our article top 8 misconceptions about reverse mortgages.

Got any questions or anything I missed?  Leave a comment below and I’ll answer any queries you have regarding reverse mortgage rates and penalties.

 

Comments 11

  • Yes, please confirm given the figures above. questions:
    1. for 100k reverse mortgage, but only used 50k over the 5 years
    how much will the payout be if i sell my property
    2. does it allow partial withdrawals
    3. is interest rate on RMLOC more than regular reverse mortgage

    • Hi Ellie

      To answer your questions:

      1. The payout would be $50k + any interest accrued once you sell. The interest (and payout) only reflect the $50k you used, not the $100k.
      2. Yes, you can make partial withdrawals. You can do monthly payments into your account. Or lump sum + monthly payments. There are minimum amounts for both though – just so you are aware of this – make sure and find out what they are.
      3. No, interest rates are very similar on a RMLOC to a reverse mortgage. They do change over time, so always check what the latest rates are.

      Thanks,
      Mich @ Reverse Mortgage Pros

  • […] We have previously covered the costs of running and breaking a reverse mortgage – in our article on reverse mortgage penalty costs and interest rates. […]

  • Can i get whole sum (55%of house value) at once and pay set up interest at selling home and nothing in between?

    • Hi Vladimir

      First of all, you should know that the amount you qualify is up to 55%. That first part is very important – not everyone can even get the full 55%.

      Whatever amount you qualify for, you can choose to pay the interest or pay nothing – it’s totally up to you.

      Hope this helps,

      Thanks,
      Mich @ Reverse Mortgage Pros

  • can I receive whole sum at once?

  • Besides Appraisal, conveyance and ILA, what other costs, eg., lender fees, etc, are involved?
    Thx..

  • Should anyone consider a reverse mortgage if they already have a conventional mortgage, secured LOC which total approx. 25% of a conservative market valuation of home assuming there are no immediate cash needs and you have a prime quality rating? I presume this would change if you do have a cash need so you want to stop making payments or generate additional income. Another important factor to consider is if the cash need is expected to be temporary (short-term and less than 5 years) or a sustained and longer-term cash need and the loan interest rate relative to the expected equity growth rate of the property. Is that correct?

    • Hi NL

      Pretty much correct. If there is no cash need (either to get the money or increase cash flow by getting rid of the mortgage payments) then a reverse mortgage is not the ideal solution. Similarly, if the cash need is just temporary, and you are easily able to make the monthly payments, a HELOC is a better solution. A reverse mortgage would only be a good solution for temporary cash flow where you wouldn’t be able to make the payments required for a HELOC or mortgage.

      Thanks,
      Mich

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