As you get older, you may be worrying about how you’ll keep your home and manage payments without a steady income. A reverse mortgage offers you the peace of mind you crave and the financial stability to make it possible, by giving you access to your home’s equity in tax-free cash and allowing you to stay in the home you love without worrying about making any monthly payments.
Reverse Mortgage: A Definition
By definition, a reverse mortgage is a loan that you secure against the value of your home that gives you access to tax-free cash without mandatory ongoing payments. It’s designed for homeowners who are 55+ and it enables you to convert up to 55% of your home’s equity into tax-free cash you can use to pay for travel, education, home improvements, debt or whatever you like.
How A Reverse Mortgage Works
In order to get approved for a reverse mortgage, you’ll first need to ensure you pay off and close any past debts, including your mortgage and home equity line of credit (HELOC).
Once approved, you’ll continue to own and live in your home, with no threat of being forced to move or sell as long as you live there for at least 6 months of the calendar year, keep your residence in good order, adhere to the loan terms and keep up with your property tax payments.
Keep in mind that interest is calculated on the outstanding balance of both principal and interest throughout the lifespan of the loan, so the outstanding balance will increase accordingly over time.
The maximum amount you’ll be entitled to with a reverse mortgage will depend on your age, your lender and your home’s appraised value. Your reverse mortgage must be repaid when the last remaining homeowner leaves the home, which generally happens through sale of property where the proceeds are used to pay back the loan. If the borrower(s) remain in the home for the duration of their lives, the loan will need to be paid back once the last borrower dies.
In Canada, there are two financial institutions that offer reverse mortgages: HomeEquity Bank and Equitable Bank. Be sure to ask your lender what payment options they offer for reverse mortgages and whether there are any restrictions or fees you’ll want to be aware of at the start.
Reverse Mortgage Requirements And Eligibility
You may be eligible for a reverse mortgage if:
- You’re 55+ years of age (if you have a spouse, they must be at least 55 as well)
- You live in a major urban centre of Ontario, Quebec, British Columbia or Alberta
- Your home is your principal residence (you live there for at least 6 months of the year)
- Your residence is owner occupied and not a secondary home or cottage
- All title holders apply as joint borrowers (ON, AB, BC)
- Your home is classified as detached, semi-detached condo or townhome
How Much Can You Borrow With A Reverse Mortgage?
A reverse mortgage allows approved applicants to access up to 55% of their home’s equity, but how much you will actually get approved for will depend on your and your spouse’s age, the location of your home, the type of home it’s classified as, your home’s appraised value, your home’s condition and how much home equity you have accessible.
Equity Needed For Reverse Mortgages
To calculate the equity you have built up in your home, take the appraised value of your home and subtract any outstanding secured debts against it (mortgage, HELOC etc.). The total amount that you can borrow must be greater than or equal to any outstanding secured debt on the home. In order to qualify for a reverse mortgage in Canada, your home must be valued at a minimum of $200,000.
Reverse Mortgage Costs
While specific costs will vary by lender, it’s important to understand what fees you may encounter as part of the reverse mortgage application. Some costs associated with a reverse mortgage may include:
- A home appraisal fee to determine the current market value of your home
- A set-up fee to get the account created and all the administrative tasks completed
- A higher interest rate than you’d see with a traditional mortgage
- A prepayment penalty if you pay off the reverse mortgage before it’s due
- Legal fees to cover closing costs or independent legal advice you may seek
A reserve mortgage gives you access to tax-free cash through your home’s equity and can be a great way to pay off debt, fund your travel dreams, pay for a child’s education, invest in home improvements and more. As long as you meet the eligibility criteria, a reverse mortgage may be a great way for you to access extra cash and find stability later in life. Looking for guidance or curious about your options? Our team can help. Reach out to learn more about our reverse mortgage choices and see if they may be a good fit for your personal situation.