For older homeowners in Ontario, reverse mortgages are an increasingly popular way to supplement their income. A reverse mortgage is a way to use the built-up equity in a property. It allows a homeowner to borrow small amounts of money on a recurring basis. Unlike a traditional mortgage, where a borrower makes payments to a lender, a reverse mortgage involves a lender making payments to a borrower. Many older Ontarians have difficulty paying taxes, utility bills and medical costs. Reverse mortgages are designed to help fund these expenses. Reverse mortgages are only available to people aged 55 or older. Typically, a reverse mortgage has higher rates and fees than a traditional mortgage and is paid off when the property is sold or if the homeowners die.
What Private Lenders Provide Reverse Mortgages
Reverse mortgages are a niche mortgage offering and are only provided by two lenders in Ontario.
- The Canadian Home Income Plan, commonly known as CHIP, is offered through HomeEquity Bank
- The PATH home loan is offered by Equitable Bank
With either of these options, you can arrange the loan directly with a bank or via a mortgage broker. A mortgage broker can also help you explore other financing options, such as lines of credit, that may better fit your needs.
About Interest Accruing Mortgages
Interest accruing mortgages are similar to reverse mortgages in the way that no mortgage payments are due. The key differences between an interest-accruing mortgage and a reverse mortgage are:
- Interest-accruing mortgages have a shorter term than reverse mortgages
- Interest-accruing mortgages typically lend in lump sums rather than installments
- The only approval requirement for an interest-accruing mortgage is the home equity
- Rates and fees are typically higher with an interest-accruing mortgage
Pros and Cons of Reverse Mortgages
Pros Include:
- No recurring loan payments need to be made
- Gives you the ability to turn your home equity into cash without selling
- No taxes are owed on the borrowed money
- Does not impact Old-Age Security or Guaranteed Income Supplement payments
- Ownership of the home does not change
- Many flexible options on how you can receive the money
Cons Include:
- Higher Interest Rates
- The mortgage will gradually drain your home equity
- If all homeowners die, the estate must repay the loan
- Repaying the loan may complicate the settling of an estate
- Less money in the estate to pass on to beneficiaries
- Fees are higher than in traditional mortgages
How to Qualify for a Reverse Mortgage
There are a few unique approval requirements for reverse mortgages, including:
- The applicant must own their own home
- All applicants must be aged 55 or older
With a reverse mortgage, everyone on title to the property must be on title to the mortgage. Everyone on title to the mortgage must be 55 or older. A reverse mortgage may only be placed on a primary residence. This means the homeowners must live in the property for at least six months each year.
All existing mortgages and secured debts on the property must be fully paid off before obtaining a reverse mortgage. In most cases, the reverse mortgage will provide the money needed to pay out all secured debts.
The major reverse mortgage providers can lend up to 55% of the appraised value of a property. For example, for a property with an appraised value of $1,000,000 and an existing $200,000 first mortgage, a typical reverse mortgage would provide a lump sum of $200,000 to pay out the first and then provide $2,000 per month to the homeowners.
This example of a mortgage would stop providing monthly payments if the borrowers borrowed in excess of 55% of the value of the property. A reverse mortgage is voided if the property is not insured or if property taxes are not paid. The lender will also require that you have a lawyer who can provide independent legal advice to ensure that the borrowers fully understand the terms of the mortgage.
Mortgage Rates and Fees
Reverse mortgage providers will typically charge higher interest rates than traditional mortgages and lines of credit. Generally, this interest rate is between 4% and 6%, but this can vary depending on many factors. These factors can include the age of borrowers, the value of the property, the value of existing debts, the location of the property, fixed or variable rate options, and more.
Closing and administrative costs are charged to the borrower upon setting up the mortgage and are paid directly to the team responsible for arranging and registering the mortgage. These costs typically range from $1,000 to $2,000 and are clearly reflected in the annual percentage rate (APR) outlined in the mortgage documentation.