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.
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 that the homeowners must live in the property for at least six months of each year.
All existing mortgage and secured debts on the property must be paid off prior to getting 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 an example 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 then provide $2,000 per month to the homeowners.
This example mortgage would stop providing the monthly payments if the borrowers have borrowed in excess of 55% of the value of the property. The reverse mortgage can also be voided in other ways such as failure to keep the property insured or failure to pay property taxes.
The lender will also require that you have a lawyer that can provide independent legal advice in order to ensure that the borrowers fully understand the terms of the mortgage.
What 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 though 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.
Reverse Mortgage Rates & Fees
Reverse mortgage providers will typically charge higher interest rates than traditional mortgages and lines of credit. Generally, this interest rate is between 4.75% and 6% but this can vary depending on many factors. These factors can include, age of borrowers, the value of the property, value of existing debts, location of the property, fixed or variable rate options, and more.
Closing and administrative costs are charged to the borrower once the mortgage is set up. These costs are paid to the team that helps to arrange and register the mortgage. These costs typically amount to $1,000 to $2,000 and are reflected in the annual percentage rate, commonly called the “APR”, in the mortgage documentation.
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
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
A person may want an interest accruing mortgage if they are younger than 55 or if they want to borrow a larger amount of money. The typical mortgage term for this kind of mortgage is one year, and money is set aside to pre-pay all mortgage payments for that term. An interest accruing mortgage is another option for people looking to take money out of their home without making payments.