Reverse mortgages in Canada

How it works

A reverse mortgage is a loan secured against your home. You can take the money as a lump sum, as scheduled advances, or a mix. You make no regular payments. Instead, interest is added to the balance, and the whole amount is repaid when the last borrower sells, moves out permanently, or dies, usually from the sale of the home.

You keep ownership of your home. You also keep the responsibilities: property tax, home insurance, and maintenance. Falling behind on any of them can put the loan in default.

Who can get one

• All owners on title must be 55 or older.
• The home must be your principal residence, lived in for more than half the year.
• Lenders set a minimum home value and limit the property types they'll lend on.
• You don't need to show income or pass a stress test, because no payments are required.

Only a few lenders offer reverse mortgages in Canada. The best known are HomeEquity Bank, with the CHIP Reverse Mortgage, and Equitable Bank. Some mortgage brokers can arrange either.

How much you can borrow

The maximum is typically up to about 55% of your home's appraised value. The older you are, the more you can access, since the loan is expected to run for fewer years. Location and property type also count: a detached house in a large city usually qualifies for more than a rural property or a condo. Any existing mortgage must be paid off from the first advance.

The cost of compounding

This is the part people underestimate. Because no payments are made, each period's interest becomes part of the debt, and future interest is charged on it. Reverse mortgage rates are also higher than regular mortgage rates.

At 7%, a balance roughly doubles every 10 years. Borrow $200,000 at 70 and, by 90, the loan is close to $800,000 without another dollar drawn. Whether that leaves meaningful equity depends almost entirely on what your home is worth by then. See it year by year in the reverse mortgage calculator, and try a 0% home growth scenario.

Fees and penalties

• Appraisal, usually a few hundred dollars.
• Independent legal advice, required before signing, typically several hundred dollars.
• Closing or administration fees, often around $1,000 to $1,500.
• Prepayment penalties if you repay in the early years, for example by selling or moving into care sooner than expected. These can be significant in the first three to five years. Ask for the schedule.

Setup costs are usually added to the loan, so they compound along with everything else.

The negative equity guarantee

Lenders typically guarantee you won't owe more than the home's fair market value when it's sold, provided you've met the loan terms. Read the conditions. Guarantees commonly exclude administrative costs and interest that accumulates after the loan becomes due. If your estate takes a long time to sell, that interest keeps running.

When a reverse mortgage can make sense

• You're older, plan to stay in the home for the long term, and have no other realistic way to cover essential costs.
• You need a moderate amount relative to your home's value.
• Leaving the home's full value to heirs isn't a priority, or your family has discussed and agreed to the plan.

Alternatives to compare first

• Downsizing: often frees more money with no ongoing interest, though moving has its own costs.
• A home equity line of credit (HELOC): usually a lower rate and you only pay interest on what you use, but you must qualify and make at least interest payments.
• Provincial property tax deferment: BC, for example, lets eligible homeowners 55 and older defer property taxes at a low interest rate.
• Government benefits you may be missing, such as the Guaranteed Income Supplement.
• Family help, structured in writing to protect everyone.

Before you sign

Involve your family early, so the plan doesn't surprise anyone later. Get quotes from more than one lender. Use independent legal advice as a real review, not a formality. And take the 15-question checklist on worksheet B-5 from the free worksheet pack to every meeting.