A large number of Kelowna homeowners in their sixties and seventies are asset-rich and cash-tight. The house has appreciated substantially over twenty years, the mortgage is gone or nearly gone, and the monthly income is a pension that has not kept pace with what things cost. A reverse mortgage is one way to convert some of that value into money you can spend without selling the home or taking on a payment.
It is also an expensive way to borrow, and it deserves a plain explanation rather than a sales pitch. What follows covers how it works, what it costs, and the alternatives that should be ruled out first.
How a Reverse Mortgage Works
A reverse mortgage lets a homeowner aged 55 or over borrow against the equity in their principal residence without making monthly payments.
The money comes to you as a lump sum, as scheduled advances, or as a combination. Interest is charged on the balance and added to it. Because nothing is being repaid month to month, the amount owing grows over time while your remaining equity shrinks.
You keep title and you keep living in the home. The loan becomes repayable when the home is sold, when you move out permanently, or on the death of the last borrower on title. Lenders set the specific timing and terms in the agreement, so the repayment window and what happens if it is missed vary between them.
Who Qualifies
- Age 55 or older, and every person on title has to meet the age requirement, not just the applicant.
- The home must be your principal residence, and lenders generally require you to live in it for at least six months of the year.
- The property has to be acceptable to the lender, which takes into account location, type and condition.
- Existing mortgages and secured debts have to be cleared from the proceeds, so a reverse mortgage on a property with a mortgage still on it pays that off first.
Income and credit are assessed far more lightly than on a conventional mortgage, since there are no monthly payments to service. That is the reason a reverse mortgage is sometimes available to someone a conventional lender has already declined.
How Much You Can Borrow
Up to 55 percent of the home’s value, and the figure you are offered depends on your age, the location and the type and condition of the property.
Age drives it more than anything else. A 55-year-old will be offered a much smaller percentage than an 80-year-old on the same home, because the lender is estimating how long interest will accumulate before the loan is repaid.
The money you receive is a loan advance rather than income. Because of that it is not taxed as income and does not reduce income-tested benefits such as Old Age Security or the Guaranteed Income Supplement, which matters for a retiree living on them.
What It Costs
The rate on a reverse mortgage is higher than on a conventional mortgage, and there are setup costs including an appraisal, legal fees and a lender closing fee. Those costs are usually deducted from the advance rather than paid out of pocket.
The compounding is the part that deserves the most attention. With no payments being made, interest is charged on a balance that includes previously charged interest, so the amount owing accelerates rather than growing in a straight line. Over a long enough period the balance can consume a large share of the equity in the home.
Whether that matters depends entirely on what the equity is for. If the plan is to live in the home for the rest of your life and the estate is not the priority, the growth in the balance may be an acceptable trade for the income it provides. If the intention is to leave the property to your children substantially intact, it is a cost to weigh rather than a footnote.
Canadian reverse mortgage lenders generally guarantee that you will never owe more than the fair market value of the home at the time it is sold, provided the property has been maintained and the terms have been met. Confirm that the guarantee is in the agreement in front of you rather than assuming it.
What to Rule Out First
A reverse mortgage should be the answer after the cheaper options have been examined, not before.
- A home equity line of credit. Considerably cheaper, and appropriate where you can service interest payments and need flexible access rather than a lump sum. The constraint is that you have to qualify on income.
- A conventional refinance. Cheaper again, if the income supports the payment. Retirement income is financeable, and some lenders assess it more generously than others.
- Downsizing. Selling and buying something smaller releases far more equity than any borrowing does, with no interest at all. It is the option people resist most and the one that most often produces the best outcome financially.
- Renting out part of the home. Kelowna’s rental market makes a suite an income option for a homeowner with the space and the inclination.
- Government benefits. Confirm that everything you are entitled to is being received before borrowing against the house to make up a shortfall.
Where those have been ruled out, and where staying in the home matters more than preserving the whole of its value, a reverse mortgage does something none of the alternatives do. It converts equity into money without a monthly payment and without requiring you to qualify on income.
Getting Advice Before You Sign
Take independent legal advice before signing a reverse mortgage. Have the lawyer explain the repayment triggers, the guarantee about not owing more than the home is worth, and what happens to a spouse who is not on title.
Involve your family in the conversation as well, not because the decision is theirs, but because a reverse mortgage changes what the estate looks like and that is better discussed in advance than discovered later.
Reverse Mortgage FAQs
Can the lender make me leave my home?
Not while the terms are met. You keep title and the right to live there. The loan becomes repayable when the home is sold, when you move out permanently, or after the last borrower dies. Obligations such as maintaining the property, keeping it insured and paying property taxes continue.
What happens to my spouse if I die first?
If both of you are on title, the surviving spouse continues to live in the home and the loan is not called. If your spouse is not on title, the position is different and potentially serious. Raise it before signing, not afterwards.
Can I pay it off early?
Generally yes, and a prepayment charge may apply depending on the lender and the timing. The terms differ, which is one of the things to compare before choosing a lender.
Will my children inherit a debt?
No. The estate settles the loan, usually by selling the home, and keeps whatever is left after the balance is cleared. Where the guarantee described above applies, the estate is not pursued for a shortfall if the sale does not cover the balance.
Does taking a reverse mortgage affect my pension?
The advance is a loan rather than income, so it is not taxable and does not reduce income-tested benefits such as Old Age Security or the Guaranteed Income Supplement.
How many lenders offer these in Canada?
A small number of Canadian lenders offer reverse mortgages. Michelle places clients with three of them: Bloom, EQ Bank and Home Equity Bank, whose reverse mortgage is called CHIP. The three differ on rate, on how much of the home’s value they will advance, and on repayment terms. The field is narrow, so the comparison is quick. Michelle takes each file to whichever of the three suits it.
To work out whether a reverse mortgage suits your circumstances, and to compare it properly against the cheaper alternatives, contact Michelle Scheibel at My Kelowna Mortgage. She is licensed by the BC Financial Services Authority, arranges reverse mortgages for Kelowna homeowners, and will tell you plainly when one of the other options serves you better.