Reverse Mortgages in Canada 2024

Reverse Mortgage Features

You can receive tax-free recurring payments, a big one-time payment, or a combination of both. You do not need to pay back this money until you move, sell, or die. With the money, you can:

• Have an income source in retirement
• Pay off debt
• Make home renovations
• Support family
• Pay for in-home care

Conventional vs. Reverse Mortgages: Understanding the Differences

In a conventional or high-ratio mortgage, you are required to make periodic payments, which gradually reduce your debt over time. As loan-to-value (LTV) ratio decreases, the risk associated with your mortgage also diminishes. However, with a reverse mortgage, the accumulation and compounding of interest can increase the LTV ratio, thereby increasing the risk over time.

Since reverse mortgages do not require monthly payments, lenders do not typically require income documentation, and your credit score plays a limited role in the approval process. Instead, reverse mortgage eligibility criteria are designed to manage the risks associated with the potential increase in LTV.

If you meet the eligibility criteria, you may be able to borrow up to 55% of your home’s equity through a reverse mortgage (With Flex Plus, you may be able to access up to 59% of your home value). While with a conventional mortgage you can borrow up to 80% of your homes value and with an insured mortgage you can access between 90% and 95% of your home’s value. You can use a reverse mortgage calculator to determine how much you can borrow.

Eligibility Criteria

• Everyone on the home's title is 55 or older. The higher their age, the more money they can borrow in a reverse mortgage.
• The home is your primary residence (you live there for six months minimum each year). Primary residence status is important because almost all proceeds from the sale of your primary residence can be used for paying your debts. In contrast, part of the proceeds from selling other properties belongs to CRA as income tax on capital gains.
• The home type is detached, semi-detached, condo or a townhouse.
• All property title holders apply as joint borrowers with you.

How Does A Reverse Mortgage Work in Canada?

Since reverse mortgage lenders want their claim to have a first position on the title, any loans tied to your home must be paid off beforehand, such as a mortgage or a HELOC. You then choose to receive a lump sum or regular payments, which can be used for anything, such as household expenses or renovations. These payments are not subject to income tax because they are not income; they are money you borrowed.

A reverse mortgage can be particularly useful for older homeowners who have a large amount of equity in their home but are finding their income (their pension, retirement funds and potentially their salary) inadequate. In other words, reverse mortgages are suitable for those who are house rich but cash poor.

Money that is borrowed is tax-free, and it will not affect Old-Age Security or Guaranteed Income Supplement benefits. Reverse mortgage interest rates are higher than regular mortgage rates, which means that your equity stake in your home decreases over time. For three reasons reverse mortgages charge higher interest rates than insured or conventional mortgages.

• The federal government has established specialized mechanisms for Canadian banks and non-bank lenders, such as credit unions, to monetize their insured and conventional mortgages. Specifically, the National Housing Act provides the framework for monetizing insured mortgages. As a result, securities created from these mortgages are known as National Housing Act Mortgage-Backed Securities (NHA-MBS). This ability to monetize mortgages significantly reduces funding costs for lenders, allowing them to offer more competitive interest rates on these mortgages.
• While many mortgage lenders in Canada offer conventional mortgages, high-ratio mortgages, and home equity lines of credit, only HomeEquity Bank, Equitable Bank and Bloom Financial provide reverse mortgages. The limited competition in the reverse mortgage market leads to higher interest rates for these products.
• Reverse mortgage lenders face longevity risk. If a reverse mortgage borrower lives much longer than the lender expects them, the accumulation of interest can push their debt above the fair market value of their home. Canadian reverse mortgage lenders guarantee that if your reverse mortgage debt exceed the fair market value of your home the lender will forgive the difference. Reverse mortgage rates are higher to compensate lenders for this risk.

In Canada, your estate will be responsible for repaying the reverse mortgage after your death, most likely by selling your home. If your estate does not do this, the bank will sell the home and recover what it is owed. A reverse mortgage will never create a liability for your beneficiaries, nor will it affect their interest in your other assets. Canada has only three reverse mortgage providers: HomeEquity Bank, Equitable Bank and Bloom Financial. HomeEquity Bank's Canadian Home Income Plan is also known as CHIP. Equitable Bank and Bloom Financial offer their product in limited geographic areas.

Reverse Mortgage Pros vs Cons

In an environment of rising home prices, reverse mortgages work great. Increases in home prices reduce the LTV ratio and thus reduce the lender's risk. While the homeowner can order a new home appraisal and increase the money, they can borrow against their home equity. While in a stagnant or falling housing market, the senior is limited to the initial amount of loan they are offered. When they spend that money, their equity in their home falls over time. If they have to leave their home in their later years, they may have little equity left in their home.

Thus, a reverse mortgage might be beneficial to some but might also be a not-so-great option for others. Here are the pros and cons of a reverse mortgage.

Pros/Advantages

• No payments required until you move or sell: This can be helpful for those who cannot afford to make payments, or even interest-only payments, that would normally be required for other loans.
• Turns your home equity into tax-free cash: This allows you to unlock your home equity without selling your home. Thus reverse mortgage can serve as an alternative to downsizing for retirement if you like to keep your home either because of an emotional connection or because you think it will appreciate fast.
• Allows you to still own your home: You remain the owner of the home, not the bank.
• Flexible options can set-up a steady stream of cash: You can choose to borrow a lump-sum amount or set-up a recurring monthly, quarterly, semi-annual, or annual advances.
• Does not affect OAS (Old Age Security) or GIS (Guaranteed Income Supplement) benefits
• You can use it as a down payment for a second home.

Cons/Disadvantages

• Higher interest rates than regular mortgages: This increases the cost of borrowing.
• Requires a home value of at least $300,000 for a CHIP Max or CHIP Open reverse mortgage and $250,000 for an Equitable Bank reverse mortgage or a regular CHIP reverse mortgage.
• Interest accrued will reduce your home equity: In exchange for requiring no interest payments during the life of the mortgage, your home equity will be reduced.
• Fees if you pay off the reverse mortgage early: Paying off a reverse mortgage early will incur a prepayment charge
• May require you to borrow a minimum amount: For example, Equitable Bank requires you to borrow at least $25,000 initially, even if you do not need the full amount.

How to Get a Reverse Mortgage

Step One: Initial online application

Both CHIP and Equitable bank offer online applications. You may need to answer basic questions about your personal information and finances within the application. After completion, you will get an immediate estimate of how much you can borrow.

Step Two: Consultation

Next, the lender will reach out to answer any questions and learn more about your financial situation. Unlike the typical mortgage documents required in Canada, you do not need proof of income or down payment. However, they want to know if any other loans are registered on your property. If there are other loans, you will likely need to pay them off with the money you receive from the reverse mortgage.

Step Three: Finalizing

The lender will finalize terms of the reverse mortgage with you. There are multiple options for receiving your payments. You can choose between a recurring, ad-hoc, or a large one-time payment. You can even combine various ways to receive payments. For example, you can choose to receive $50,000 initially and $5,000 every six months.

The lender will also conduct a property appraisal to evaluate your property officially. Your reverse mortgage limit will be based on this valuation.

Step Four: Repayment

No payments are required until the last registered homeowner leaves the house. However, you can make pre-payments, which may be subject to penalties if made in the middle of a term.

Where to Get a Reverse Mortgage

In Canada, there are two major providers of reverse mortgages. Initially, HomeEquity Bank was the only financial institution to offer reverse mortgages through their Canadian Home Income Plan (CHIP).

More recently, Equitable Bank started offering reverse mortgages at lower rates in 2018. However, they have more requirements, such as living in a major city within Ontario, Quebec, British Columbia, or Alberta. Continue reading to learn more about the two companies.

For a full list of rates for various terms and products, visit our reverse mortgage rates page.

To manage risk, Equitable Bank only lends against the security of homes in the more active housing markets of Ontario, Quebec, British Columbia and Alberta. Equitable offers reverse mortgages with a lower LTV than the HomeEquity Bank, even in those markets. As a result, CHIP reverse mortgages have the lion's share of the reverse mortgage market. Both CHIP and Equitable Bank reverse mortgage rates are much higher than current mortgage interest rates in Canada. Currently, it offers reverse mortgages to residents aged 55+ in Ontario, BC and parts of Alberta.

Frequently Asked Questions