How Does a Reverse Mortgage Work in Canada?
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Discover the methodologyA reverse mortgage is a financial tool, that allows homeowners to take a loan by freeing equity on their property. However, it is only available to a specific group of consumers. That’s because a reverse mortgage loan is for people over the age of 55 who own their homes. It is possible to borrow up to 55% of a property’s value in installments or a lump sum.
One of the unique aspects of a reverse mortgage is that it is a loan that is not paid back until the future. When you borrow against your equity, you continue to live in the home. Repayment is not due until the owner moves away or until the borrower dies. In either circumstance, the sale of the property allows the creditor to recoup their debts.
On the following page, take an in-depth look at reverse mortgages to decide whether they are a workable solution for you. Like any major financial decision, it is important to carefully consider every aspect of the product. Our information below leaves no stone unturned, allowing you to make an informed decision.
What is a CHIP reverse mortgage?
CHIP (Canadian Home Income Plan) was the first reverse mortgage in Canada, provided by HomeEquity Bank. Despite the name, it is not at all similar to a mortgage. Rather than being a mechanism for purchasing a home, it is a mechanism for borrowing against it. It that way it is more similar to a HELOC, or Home Equity Line of Credit. It allows borrowers to get a large sum upfront. In exchange, they agree to pay it back in full when they pass away or sell the property. There are pros and cons to a CHIP reverse mortgage, and we will look at them further below.
As well as HomeEquity Bank, there is a solution provided by Equitable Bank. CHIP reverse mortgages from HomeEquity Bank are available in all Canadian provinces, while Equitable Bank’s solution can only be found in a selection of cities.
Good to know
It is important to know, there are only two providers of reverse mortgage loans in Canada.
If you are interested in borrowing against the equity in your home, consider applying for a HELOC instead. Get a free quote today:
Borrow against the equity in your home
Compare HELOCs
How does a reverse mortgage work?
A reverse mortgage has a specific set of criteria, meaning only a subset of Canadians is eligible. As well as needing to be 55 or older, all applicants must own their home or have at least 50% equity in the property.
When you get a reverse mortgage, you can use it to pay off any loan or credit taken out on your home. That means closing the mortgage, second mortgage, home equity line of credit (HELOC) or other forms of credit. You can also use the funds for other purposes, including:
- Home improvements
- To pay for regular bills and day-to-day living
- Healthcare expenses
- Debt consolidation
Good to know
Once you have a reverse mortgage, you may no longer be eligible for other forms of secured home credit, such as a HELOC or second mortgage.
What are the eligibility criteria for a reverse mortgage?
When you apply for a reverse mortgage from one of the two providers in Canada, you will need to meet the following criteria:
HomeEquity Bank Canadian Home Income Plan (CHIP) criteria
- A Canadian homeowner
- Aged 55 or older (if you have a spouse, both of you must be at least 55 years old to be eligible)
- Location of your home
- Type of home (for example, detached, condo, etc.)
- The appraised value of your home (minimum appraised value of $200,000)
- The condition of your home
- The amount of home equity
Equitable Bank reverse mortgage criteria
- You are 55 years old or over
- You live in the major urban centres of Ontario, Quebec, British Columbia, or Alberta
- Your home is your principal residence (you live there for at least six months of a calendar year)
- All titleholders of the residence apply as joint borrowers (in ON, AB, BC)
- The residence is owner-occupied and not a second home or cottage
- Your home is detached, semi-detached, a condo or a townhome
How much can I get with a reverse mortgage?
When you take out a reverse mortgage, you can get as much as 55% of your home equity. For example, if your home has a value of $400,000, you could borrow up to $220,000 if you own all of the equity in your home.
A CHIP reverse mortgage from HomeEquity Bank is only available for applicants who own their home and have paid off in full their original mortgage (if any). Equitable Bank does allow applications from people who own over 50% of the equity in their property. Under the same example, if you own 70% of the equity in your home, you could be eligible for up to 55% of that home equity ($154,000).
While 55% of equity is available, what you can borrow with a reverse mortgage depends on your home’s value, your lender, and your age.
What is the interest rate on a reverse mortgage?
Because there are only two providers of reverse mortgages in Canada, your choices are limited when looking for the best rate. Furthermore, Equitable Bank is not available in all provinces. So for many Canadians, the CHIP reverse mortgage from HomeEquity Bank is the only option. That means shopping around for the best rate doesn’t really apply to this financial solution.
However, the interest rate is currently between 4% and 5% depending on the term length of the loan.
What are the pros and cons of a reverse mortgage?
Here is what the HelloSafe team likes and dislikes about reverse mortgages.
Why a reverse mortgage may be right for you:
- You avoid the inconvenience of monthly loan payments
- Leverage the value of your home without needing to sell the property
- There are no taxes on reverse mortgage loans.
- The loan does not impact your Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.
- You remain the sole owner of your home.
- You have flexibility about how you get the money (lump sum or installments)
Why a reverse mortgage may not be right for you:
- Reverse mortgages have higher interest rates on other home equity borrowing
- It is possible your home equity/value will decrease before the loan matures
- If you die, your estate has a limited time to repay the loan and interest
- Sometimes the time to settle an estate is longer than the limit to close the loan
- Associated costs are generally higher than other mortgages or home equity loans.
Do I still own my home after a reserve mortgage?
One of the biggest selling points of a reverse mortgage – you remain the owner of your home – is not really a benefit at all. You do remain on the title during the loan period and are not required to transfer ownership to the lender. However, the only way to close the loan is to either sell your home or to die.
That may be fine for you because a reverse mortgage is essentially trading your home for a good retirement or money for other needs. Still, there are important considerations to make. For example, if you decide to sell your home down the line, a large chunk of the money from the sale will be used to pay off the reverse mortgage. If your home has lost value over the loan term, you may end up paying a larger chunk of your equity than you originally planned.
Alternatively, when you pass away, your estate will be left to pay off your reverse mortgage. This means selling your home rather than leaving it to a loved one. There are times when the process for settling an estate is longer than the period the lender gives to pay back the reverse mortgage.
HELOC vs reverse mortgage
While the ability to remain the owner of your home is enticing, the high-interest rates and limitations of a reverse mortgage are not always the best solution. If you need to borrow off the equity in your property, a home equity line of credit (HELOC) is a worthy alternative.
A HELOC is almost like a second mortgage because you place a second lien on the property in addition to the existing lien from your first mortgage. However, a HELOC is different because instead of receiving a lump sum, you have a line of credit to access funds when you need them.
Good to know
What to learn more about what a HELOC is and how it works? See our complete HELOC guide to answer all your questions.
For many borrowers who what to tap into the equity in their home, a Home Equity Line of Credit can be a better option than a reverse mortgage. Use our comparator below:
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Is a reverse mortgage a good idea?
Like any financial solution, the quality of the product depends greatly on your individual circumstances. And that is certainly true with a reverse mortgage. There is no doubt that a reverse mortgage can be a good idea for some people. If you are a homeowner over 55, it provides a feasible way to secure a considerable sum of money without selling your home.
That said, the less-than-stellar interest rates and nature of pushing your debts down the line may not be the best answer to some. For most homeowners, there are more favourable ways to secure equity from your property.
