How Reverse Mortgages Work in Canada
When getting a reverse mortgage it is crucial to know what they are, and how they work. We're going to explain the ins and outs of reverse mortgages in this post.
What a Reverse Mortgage Is
A reverse mortgage is a loan, but not a typical loan. Homeowners over 55 with equity in their home can borrow against their homes value and receive funds as a lump sum, or in scheduled payments. A reverse mortgage doesn't require the homeowner to make any loan payments; the loan balance is due when either the borrower dies, moves permanently, or sells the home.
Why Get a Reverse Mortgage?
There are many reasons to get a reverse mortgage, and you can use the funds you receive however you please. These are some of the most common reasons Canadians get a reverse mortgage:
- Pay down debt
- Not having to take money out of their investments
- Lending adult children down payments
- Renovations
- Funds to travel and enjoy retirement on an annual basis
- Short term loans
- Purchasing a new home (Sell existing and reverse the new home)
Keeping the Mortgage in Good Standing
The only thing required to keep your reverse mortgage in good standing is to pay both your property taxes and property insurance annually.
No Credit Requirements
Reverse mortgages are not credit dependant. The only requirement is that you are able to pay your annual property taxes and insurance. If there is an existing mortgage it will have to be paid in full before receiving the Reverse Mortgage, the reverse mortgage can be used to pay off an existing mortgage.
Cost of a Reverse Mortgage
Each lender has specific fees, and the fees don't vary person to person. A appraisal is required, which will be either in-person, or an automated value method; the average appraisal cost is about $375. A ILA Lawyer (more about this later) will also be required, and possibly other legal counsel as well. The ILA lawyers fee is typically around $500 (but the price ranges). Legal fees can be deducted from the advance in most cases. SimpleReverse.ca works for you at no extra costs, as commission is received from the lenders.
Prepayments
While you never have to make payments on a Reverse Mortgage there are options if you want to make payments. Firstly, you can pay up to 10% annually on each anniversary or what you have available. This can be any year of the term. The money goes towards interest first and then equity. You can also pay the interest monthly. Again, monthly payments are not required. Some clients only want a Reverse Mortgage for a short period.
Penalty Fees
If you choose to pay out the mortgage early, there will be penalty fees. It depends on the lender and is either a percentage, or number of interest payments. For example: 1st year you may have to pay 5% or 5 months of interest, 2nd year 4% of 4 months interest, etc. When ended early due to death, the fees can also be decreased depending on the lender.
Interest Rates
The interest rates vary by bank. Rates renew at the end of the term. For example, if you take a 3 year rate you have to renew at the new rate in 3 years. Say the 3 year rate is 4.39% and the 5 year rate is 4.89% (please contact us for accurate, current rates), many people would choose the 5 year rate as they know they have 4.89% locked in for 5 years rather than risking higher rates at renewal.
Equity and Ownership
In almost all cases, you will still have remaining equity in your home. The reason being is that homes in Canada typically appreciate in value year after year. SimpleReverse provides estimates with numbers going into equity and interest in more detail for your property. You will still be the owner of your home.
ILA Lawyer
A Independent Legal Advice (ILA) lawyer must be obtained by the legal titleholder of the property. ILA is provided for your benefit to ensure you understand the terms and conditions of the reverse mortgage, are of sound mind and judgement, and that you are not being pressured to sign the mortgage documents.
Applying for a Reverse Mortgage
To apply for a reverse mortgage start by contacting SimpleReverse or using our estimate tool to get your estimates. We will provide you with rates and details from all the relevant lenders, review the options for you, answer any questions, then if everything looks good we can start the application process either online, over the phone, or in person. Before the application is sent in electronically we will determine your home value together. Both banks generally require copies of Property Tax Assessments, Home Insurance policy, verification of income and identification. When your Reverse Mortgage is approved, there will be paperwork to sign with us electronically again through a secure site. The file will then be instructed to your lawyer, who you will meet with. The funds will be automatically deposited to your account. The process is quite quick as long as all of the paperwork is received and signed.