Is a reverse mortgage for me?

A Reverse Mortgage is a financial product specifically designed for homeowners who are at least 55 years old. It allows them to convert a portion of their home equity into cash without the need to sell their home or make regular mortgage payments. Here are some key points to understand about reverse mortgages in Canada:

1. Eligibility Criteria: Typically, the primary homeowner must be at least 55 years old. The homeowner should have a significant amount of equity in their home.
2. Loan Amount: The amount that can be borrowed through a reverse mortgage is based on factors such as the homeowner's age, the appraised value of the home, and the location of the property. The older you get, the more equity you can take from your home. This is designed so there is very little chance the amount you owe will exceed the value of your home. For example, if you own a home worth $750,000 in a large urban centre you can likely get $262,000 to $325,00 at age 60, $300,000 to $400,000 at age 70, to a maximum of $412,500, 55% of the property value, as you get older. There are other charges associate with setting up a Reverse Mortgage such as appraisal fees, legal fees and closing and administrative costs.
3. Repayment: One of the distinctive features of a reverse mortgage is that there are no regular mortgage payments required. The loan is repaid when the homeowner sells the home, moves out permanently, or passes away. There are charges associated with this which can reach $3,000 or more. Interest on the loan accrues over time and is added to the principal, which means the total amount owed increases over time.
4. Homeownership Responsibilities: The homeowner is still responsible for property taxes, home insurance, and maintenance of the property. This is important. If you let the condition of the property deteriorate you could be asked to pay the loan back immediately.
5. Interest Rates: The interest rates on reverse mortgages are generally higher than those on traditional mortgages. Current rates (November 2023) are 1.5% to 3% higher than the comparable rates for a traditional mortgage and about 2% higher than a Home Equity Line of Credit.
6. Loan Term: The loan term is usually long-term, though the interest rate is only applicable for an agreed term of up to 5 years, at which point the loan “resets” at current rates. The loan becomes due when certain conditions are met, as mentioned earlier.
7. Impact on Inheritance: Since the loan is repaid from the sale of the home, there may be less equity available for heirs. However, the homeowner is generally protected from owing more than the home's appraised value at the time of repayment.

What does this all mean for you?

This is not free money, in fact it is rather expensive money. But maybe worth it in the end. It’s important to really look at the costs and the options.

Here’s a quick example, the numbers may not be exactly right…but they are close.

Imagine you borrowed $300,000 on January 1, 2023 on a 5 year term at 7.69%.

You would immediately pay an administrative fee of around $1,800 and an appraisal fee of about $750. This could be put on the mortgage. You would also pay legal fees of around $1,000 which would come out of your pocket.

One year later the amount you owe would be around $326,200, almost 9% more than you borrowed.

By the end of year 5 you would owe about $441,000…47% more than you borrowed.

If your home value increased by the long term average of 3% per year, your home would now be worth around $870,000, an increase of $120,000. Your equity would be around $330,00.

Assuming you keep your Reverse Mortgage going at the same interest rate, because you don’t have $441,000 to pay it off. By year 10 you will owe more than $640,000, more than double what you were paid. You will have accrued more than $340,000 in interest in the account. Your house, however, might be worth around $1,000,000.

My back of the envelope calculations tell me that Reverse Mortgages may be an option for those 75 and older who need a significant amount of money for some good reason. If you need money to meet day-to-day obligations there may be cheaper alternatives for you, like a Home Equity Line of Credit, where you only take the money as you need it…as long as you factor in monthly payments.

The major risk is that your home may not increase in value sufficient to cover what you owe at some point, so make sure that you get an experienced real estate lawyer who can lay this all out for you in advance.

I'm Steve Willson, a licensed Mortgage Agent with Mortgage Alliance. The opinions here are my own. Everyone's circumstances are different, so you should always consult a reputable professional to give you the best advice. You can reach me through my website: stevewillson.ca