Before we get to all the important information regarding a reverse mortgage, I strongly suggest you download the free guide to a reverse mortgage on our sister site.
This is the most jam packed and comprehensive guide to reverse mortgages in Canada out there – if you are seriously considering this option, then this is pretty much a must read – download it at the link above.
With that said, today in response to several requests from our customers, I am going to dive into everything related to reverse mortgage.
It is very clear to me that very few people understand reverse mortgages and are confused by things they may have read or heard about them (much of which relates to U.S. reverse mortgages and activities that are illegal in Canada).
So in this article I’m going to outline:
- What exactly is a CHIP reverse mortgage?
- The pros and cons of a reverse mortgage
- Confusion caused by reverse mortgage features in the United States (that do not exist in Canada)
- Who is a good candidate for a reverse mortgage
So, with much to go through, I’ll get started.
What Exactly Is A Reverse Mortgage?
A reverse mortgage is a speciality mortgage product only made available to people in Canada over the age of 55. In Canada, there is the CHIP Reverse Mortgage – as it is a renamed version of a product that used to be called ‘CHIP’ (Canadian Home Income Plan) – offered by Home Equity Bank or the PATH Reverse Mortgage offered by Equitable Bank.
It gets its name from the fact it is almost the opposite (or ‘reverse’) of a traditional mortgage – in that there is no credit score requirement, you don’t need income to qualify and there are no monthly payments. So the lender is paying you money, without the requirement that you repay any of it – which is why it is considered the ‘reverse’ of a traditional mortgage.
This can lead many people to be suspicious of a reverse mortgage – because it seems too good to be true.
However, there is still interest charged on the mortgage – with the rate being a little bit higher than a Home Equity Line of Credit and more higher than a traditional mortgage.
Basically, you have to take on a slightly higher interest rate on the mortgage to get all the benefits of a reverse mortgage. However, the interest rate is still not as high as an unsecured line of credit, personal loan or credit card.
For more on the interest rates and the things you need to know, check out this article: Reverse Mortgage Rates And Penalties.
You should note that – while this seems like a great deal to you – the lender still gets something out of it. The lender makes their money if and when the owners pass away and the house is either sold or re-mortgaged to pay back the loan – plus interest.
So this is not a handout and not a free lunch – the lender does get something in return, making it a viable product for them to offer.
The best way of thinking about this is that with a traditional mortgage, amortization periods can be 25 to 30 years – so it can be 25 to 30 years before the lender gets their money back in full. A reverse mortgage is following the same concept – long term lending. Except that the lender won’t get their money back until all home owners pass away.
The Pros And Cons Of A Reverse Mortgage
Briefly, the advantages of a reverse mortgage in Canada can be considered to be the following:
- Tax free money. There are literally no taxes to be paid on the money received, since it is still technically a loan.
- You get to stay in your home for life – there is no way a reverse mortgage can cause you to lose your home.
- No monthly payments.
- No income or credit score is required to qualify.
The disadvantages of a reverse mortgage are considered to be:
- The rate is slightly higher than a Home Equity Line Of Credit (HELOC) and much higher than a traditional mortgage. However, not anywhere as high as an unsecured line of credit (credit line), personal loan or credit card.
- Moving home – if you ever wanted to – is slightly harder, as now you have to discharge a mortgage. Note that this is the same process with any mortgage or HELOC though.
- Assuming that you spend all the money, or you aren’t simply replacing one mortgage with another, you are potentially reducing the size of your estate. This would also assume that home equity growth doesn’t outpace interest accumulation – which is often not the case because of how the mortgage is structured (that the maximum equity withdrawal is 55%).
- You may not qualify for the full 55%. The amount you qualify for depends on your age, the property type and property location. The lender obviously favours properties in urban areas that are easy to sell – in case this is what they have to do to get their money back once the home owners pass away.
This is not a complete list of pros and cons of a reverse mortgage – I would suggest you to mortgage professional to get feedback on the specific advantages or disadvantages that apply in your particular situation.
The following article also goes into more detail: Pros And Cons Of A Reverse Mortgage.
Reverse Mortgages In The U.S.A vs The Reverse Mortgage In Canada
If you have heard a bad story about a reverse mortgage, the chances are it relates to the U.S.A rather than Canada.
The reason is that the U.S. product is completely different in every way shape and form to the Canadian product. However, because they are only 2 of a few places that use the term ‘reverse mortgage’, much confusion exists and some people attribute stories about the U.S. product to Canada.
For example, if you ever see anyone using the terms FHA or HUD – they are 100% talking about the American reverse mortgage product. These terms (and agencies) do not exist in Canada.
In addition to this, the U.S. reverse mortgage has obtained it’s bad reputation through practices like ‘churning’ – where the reverse mortgage is essentially sold to another lender. This practice is illegal in Canada. And some lenders in the U.S. gave reverse mortgages to husbands or wives on title who were under 55 and did not qualify for a reverse mortgage (actually in the U.S. the age restriction is 62) – meaning that if the person on title did pass away, the remaining spouse had to either sell or remortgage. Again – this does not happen in Canada – anyone on title must be over 55 years old to qualify in Canada.
In essence, reverse mortgages in the U.S.A are not as well regulated and much more of a risky product in Canada.
The Canadian reverse mortgage is much more tame and safe, by comparison. This is pretty similar to all mortgage products and one of the reasons Canadian banks did not need massive Government bailouts to the same extent that the U.S banks did during the 2008-09 financial crisis.
Are You A Good Candidate For A Reverse Mortgage?
It is pretty difficult to come up with one or two important pieces of criteria to decide if you are a good candidate for a reverse mortgage. Speaking to an independent mortgage professional is important advice.
With that said, there are probably 2 very important elements that would make you a good candidate for a reverse mortgage or not (assuming you meet the other criteria – that you are over 55 years old):
- Do you need additional cash – either by getting the money directly or through not having to pay your monthly mortgage/line of credit/credit card bills every month? Reverse mortgages are best suited to people in need of cash or a reduction in their home loan bills. If you don’t actually need the cash or to pay off any existing home loans, then getting an emergency line of credit or Reverse Mortgage Line Of Credit might be a better option.
- Are you looking to stay in your home for life? Again this is a big consideration, as reverse mortgages are mainly intended to help you stay in your home for life. If this is not important to you, then you might consider selling your home and downsizing as another option.
These are the 2 main considerations, however, as noted, speaking to an independent and objective mortgage professional is always advised.
However, wanting to stay in one’s home for life plus additional cash/cash flow savings are the 2 biggest reasons why someone would be a good candidate for a reverse mortgage.
If you are not sure, please check out our sister site – Reverse Mortgage Pros – where a mortgage professional will look at your situation and let you know if reverse mortgage is a good fit for you.
And don’t forget to download your free reverse mortgage guide at our sister site at the following link: Reverse Mortgage in Canada.