A reverse mortgage is a financial tool for Canadian homeowners aged 55 and older who need access to cash but do not want to move from their home or give up ownership or title. It is a way to leverage their equity in the home, converting up to 55% of their home value into tax-free cash. Unlike other types of mortgages, there are no regular mortgage payments for the borrower to make, and the loan does not have to be paid back until the borrower moves or sells their home.
How borrowers qualify
The homeowner must be aged 55 or older to qualify for a reverse mortgage. If more than one person is on title, all titleholders must be at least 55 years old. The home must be their primary residence, which generally means they must live in it at least six months out of a year. Borrowers do not necessarily require a good credit rating – even those with lower credit scores can qualify. The amount they qualify for depends on:
- The location of the home
- The home’s appraised value
- The borrowers age
How borrowers use the money
The money can be used for almost anything the borrower wishes. This includes financing:
- Living expenses
- Bill payments
- Home renovations
- Debt repayment
- Purchasing a second property
- Healthcare expenses
- Helping a loved one
Borrowers do not have to use the money for any specific purpose. They may even take out the reverse mortgage so they can avoid moving, selling, or downsizing. Because the money is tax-free and borrowers do not have to make regular payments on it, the reverse mortgage can offer some financial flexibility and freedom. Borrowers can decide whether they want the money in full as a lump sum payment or taken in regular payments as a steady stream of income.
How the reverse mortgage is paid back
So long as the borrower lives in the home and does not sell it, the reverse mortgage does not have to be paid back. Interest accrues and is added to the principal, and if the home value appreciates, the homeowner may have access to additional equity. The loan must be repaid if the borrower moves or sells or if the last borrower dies. In the case of a death, the estate is responsible for paying the remaining amount owing on the reverse mortgage. Once the remainder of the loan is paid, the estate keeps all remaining equity from the home.
Other important considerations
Reverse mortgages typically come with higher interest rates than traditional mortgages or home equity lines of credit. Additionally, because the interest is added to the principal, the owing balance increases over time. If the borrower wants to pay off the loan early, they may be subject to early repayment charges. Finally, while a borrower has a reverse mortgage on their home, they may not be eligible for future home equity lines of credit or other financial vehicles that are secured against their home. There are some important benefits to a reverse mortgage, however. These include borrowers’ ability to stay in their homes during retirement and to keep full ownership and title. They also have access to tax-free financial resources without impacting their government benefits such as CPP and OAS. Finally, if the value of their home increases, they can access additional equity and keep the additional value of their home once the loan is paid off.