For the majority of Canadian retirees, their home represents their most valuable asset. With life becoming increasingly expensive in Quebec and the low amount of public pensions, it is possible to mortgage your house to benefit from it. This is where the reverse mortgage comes in. In this exclusive guide, XPERTO explains everything you need to know about this financial product.
What is a reverse mortgage?
A reverse mortgage can be an excellent solution for seniors aged 55 or over who are looking for a way to meet their financial needs.
Definition
It is indeed a mortgage loan that uses the equity in your home in Canada to allow you to borrow money (tax-free) without having to sell it.
It is possible to obtain up to 55% or more (up to 59% with Equitable Bank) of your property’s value. This money has no impact on your Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits. The maximum amount that senior homeowners can borrow varies depending on the following factors:
- the age of the lender and those listed on the property title,
- the condition of the house to be mortgaged,
- the type of property and its appraised value,
- the lender itself.
With a traditional mortgage loan, the lender makes monthly payments to repay and build equity. In contrast, with a reverse mortgage, you do not need to make payments until you have concluded the sale of your property. You will also have to repay the mortgage if you move, if the last borrower dies, or if you default on payment.
Usage examples
Olivier is a 55-year-old retiree who wants to help his grandson make a down payment without having to liquidate his investments or retirement savings. The reverse mortgage is therefore his best option, as he does not intend to sell his house. Thanks to this product, Olivier will remain the owner of his property while benefiting from credit to realize his project. The repayment of the money and interest from the reverse mortgage will occur upon the sale of his house, his move, or his death.
How to calculate a reverse mortgage?
The calculation of a reverse mortgage loan can seem difficult. You can use the CHIP calculator from HomeEquity Bank which allows you to easily calculate the reverse mortgage. This intuitive tool, accessible to everyone, allows you to obtain an estimated amount for your loan.
Depending on your criteria, financial institutions specializing in reverse mortgages can grant you a loan of up to 55% of the value of your primary residence. After calculating the estimated amount of the reverse mortgage, an independent appraisal is carried out to get a more precise amount.
Regarding the costs of a reverse mortgage, here is what the Financial Consumer Agency of Canada says, an institution that protects the rights and interests of consumers of financial products and services.
Eligibility criteria and procedure
To benefit from a reverse mortgage loan, you must meet certain conditions.
Required conditions
To be eligible, the applicant must meet the following criteria:
- the owner registered on the property title must be at least 55 years old,
- the property must be your primary residence (the lender must live there at least six months per year),
- the value of the house must be estimated at a minimum of $250,000,
- the type of house (single-family home, semi-detached house, townhouse, or condo).
If the applicant still has a mortgage or another lien on the residence, it will have to be paid with the money from the reverse mortgage or other sources of funds. The remaining amount, i.e., the loan advance minus the current mortgage/liens, will be advanced to the owners.
When these conditions are met, the reverse mortgage expert will calculate the maximum loan amount you can access based on the estimated value of your home and your age. Before the application is approved, a professional will need to appraise the property.
The appraisal will confirm the market value and the amount the applicant can borrow. You will then need to obtain independent legal advice from a lawyer to ensure that the reverse mortgage is the best solution for your situation. You can also speak with trusted professionals or your family for a second opinion.
Application process
You must first submit an application to obtain a reverse mortgage. This can be done through a mortgage broker in Canada. Please consult one of our experts to benefit from tailored support. You will need to answer a few questions and provide personal information to determine if you are eligible.
Once the application is completed, you will receive an estimate of the amount you can borrow. The lender will then contact you to address your concerns and get more information about you and your financial situation. You will be asked, among other things, if other loans are registered on the house.
At this stage, the bank may also request a property appraisal. Once the application is validated, you will need to finalize the terms of the reverse mortgage with the lender and choose how you will receive the funds.
Which institutions offer reverse mortgages?
In Canada, there are currently only two financial institutions that offer this type of loan. The CHIP reverse mortgage, which was called the Canadian Home Income Plan, is a product of HomeEquity Bank. Originally, this program was set up to allow retired homeowners to benefit from their retirement without having to part with their property.
Nowadays, this institution (created in 1986) reserved for Canadians aged 55 and over is a leader in reverse mortgage loans. Initially functional only in Vancouver, the CHIP reverse mortgage has been accessible in all Canadian provinces since 2001. In addition to the mortgage, HomeEquity Bank also offers solutions and advice for better financial planning for Canadians’ retirement.
As for Equitable Bank, it offers reverse mortgages to residents of urban areas of Quebec, Ontario, British Columbia, and Alberta.
Other financial institutions offer other options:
- the Desjardins reverse mortgage,
- the National Bank reverse mortgage.
The Desjardins bank does not offer this type of loan as such. The product that comes closest is the “Marge Atout” offer. It is a traditional home equity line of credit (HELOC) intended for refinancing a mortgage. National Bank offers solutions to refinance your mortgage, such as the Evolutive Clause and the All-in-One mortgage line of credit.
Reverse Mortgage: Advantages and Disadvantages
In some cases, a reverse mortgage loan can be advantageous. However, this product has disadvantages that must be considered. XPERTO presents all these assets and drawbacks in more detail.
Benefits for retirees
It is not necessary to have an income or good credit to be eligible for a reverse mortgage. Flexible options allow you to access the money in a single payment or in regular payments. Another advantage of the reverse mortgage is that it is not essential to make regular repayments.
You remain the owner of your home, while keeping the money from the property. As long as you occupy your property, the lender cannot demand the sale of the residence or ask you to move to repay the loan. You can, however, repay interest every year (in full or in part). You must also continue to pay for a valid fire insurance policy, property taxes, as well as heating and maintenance costs.
The borrowed amount is tax-free and can allow you to maintain your lifestyle, for example with the payment of an annuity. Generally, when you meet your mortgage obligations, the lender guarantees that you will never repay more than the value of your home. Among these obligations, we highlight paying insurance and your municipal taxes.
Potential risks
The interest rate on a reverse mortgage is often higher than for other types of loans (for example, a home equity line of credit). Early repayment of the loan is subject to penalties. Upon your death, it is the estate that will repay the mortgage within a period established in the contract. This period may prove to be shorter than the time necessary to settle the estate.
A reverse mortgage is also not the best option if you wish to leave the value of your residence as an inheritance. The debt accumulates over time and the equity in your home may decrease. The costs associated with reverse mortgages can also be higher than those of other mortgage and loan products.
Tips for choosing a reverse mortgage
Choosing a reverse mortgage involves considering a number of factors. Discover our tips for making a wise choice.
Select the right lender
When it comes to choosing the right reverse mortgage lender, it can be complex to know where to start. You must first research an experienced lender who meets your needs and offers you the financial security you need in retirement. The reputation and experience of the lender are also very important factors.
Look for reviews and testimonials from previous clients to get an idea of the quality of their service. To choose the right lender, also take into account the loan conditions and the fees associated with the reverse mortgage. Choose a financial institution that offers reasonable fees, competitive interest rates, and flexible repayment options.
It is also essential to approach a lender licensed and accredited by the competent authorities. This is the time to seek advice from a mortgage broker to make an informed choice. At XPERTO, we have a team of professionals who will guide you in your choice.
Questions to ask before committing
A reverse mortgage can be an interesting solution for senior homeowners aged 55 and over. Before you proceed, however, you should ask yourself some determining questions:
- Do you absolutely want to keep your house?
- Can you get a low-cost home equity line of credit instead of a reverse mortgage?
- With a reverse mortgage, how much must be repaid if the value of the debt (including interest) exceeds the value of the residence?
- Can your financial institution offer you other products better suited to your financial needs?
A reverse mortgage can limit your access to other financing options secured by your property. Compare the eligibility conditions, interest rates, and early repayment penalties between the different organizations that offer reverse mortgages.
Do you need experienced brokers in Quebec? Do not hesitate to solicit the services of XPERTO. Our team will know how to intelligently accompany you in the success of your project.