10 Apr


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Let’s start at the very beginning: what is a reverse mortgage?

A reverse mortgage is also known as a home equity conversion. A reverse mortgage allows elderly (retirement-age) homeowners to access their home equity and delay further mortgage payments until they sell or move out of the home, or pass away. While the loan can grow to exceed the value of the home, the borrower or their estate should not be required to cover any costs exceeding the value of the home.

Reverse mortgages are handled by capital mortgage companies, and are not insured by the government in Canada. While they can be helpful for those with inadequate retirement savings, there are also risks involved, especially if reverse mortgages are not used for their original purpose of supplementing an elderly person’s retirement. In Canada, an individual is required to get independent legal advice before being approved for a reverse mortgage. This helps the borrower understand the reverse mortgage, and helps both the borrower and the lender to avoid any scams or frauds.

Who Is Eligible?

To ensure reverse mortgages are used for their original purpose, in order to be eligible for one you must be 55 years of age or older. If the borrowers are married, both must meet this minimum age.

You must apply to a capital mortgage company in order to be approved for a reverse mortgage.

The borrower, or borrowers, must own or nearly own their entire property. There are no maximum or minimum income requirements.

Size Of The Loan

There are many factors that determine the size and terms of the loan received from the capital mortgage company. Age is a big factor, with a larger loan being paid out to those older in age. The less time the mortgage company thinks you will live in the home, the higher the loan they will give, as there is less chance of the loan outgrowing the value of the property.

Factors like property value, interest rate, and any program requirements specific to the capital mortgage company also affect the size of the loan given. There’s a huge range in loan amounts, depending on all these factors, with loans ranging from $20k to $750k.

Length Of Loan

Like the size of the loan, length is dependant on a number of factors, including the specific reverse mortgage program you’re on. You may have a fixed term, or no fixed term at all.

Reverse Mortgage Costs

There are some costs associated with getting a reverse mortgage, which are paid to the private lender, or the capital mortgage company. In order to determine the size and length of your loan, the property will need to be appraised and property value assessed. You will have to pay for the appraisal, as well as any other legal, administrative, and closing costs.

Distribution

There are several ways you will receive your loan:

  • a lump sum;
  • a line of credit;
  • an annuity; or
  • a combination of these.

Once the money is received there are no terms on how it is spent. The borrower is, however, still responsible for any taxes, maintenance and insurance fees associated with the house. Depending on the terms of the mortgage lender, the reverse mortgage may be applied to a new property should the borrower move house.

Payment

The loan comes due upon the selling or moving out of the home, or the death of the borrower. The borrower may be able to pay the loan back before any of these occur, but if not, the loan will be taken in the form of equity. The borrower, or the borrower’s estate, will not have to pay any additional costs exceeding the market value of the house.

Some concerns you might have about reverse mortgages include:

  • Does ownership transfer? Some borrowers are worried about ownership of the home being transferred to the bank, or to the capital mortgage company. With a reverse mortgage, the ownership of the house will never change, and will be retained by the lender even after the home is vacated.
  • Will the loan incur lots of fees? There are actually very few expenses associated with a reverse mortgage, as the loan is paid out of the loan proceeds. The only out-of-pocket costs will be the initial appraisal, and legal advice, as well as any other administrative fees.
  • Will the borrower’s estate become responsible for any of the loan? While the children or inheritors of the borrower are often concerned about having to pay the loan off should it exceed the market value of the home, they will not have to. Even if the loan balance is large, the borrower or their estate will not be responsible for paying anything beyond the appraised market value of the home.

As you can see, there are many factors at work when it comes to reverse mortgages. It can be very confusing. If you are considering a reverse mortgage, or considering it for your parents or other elderly relations, the best thing to do would be to contact a mortgage professional, preferably someone who specializes in reverse mortgage. They will be able to counsel you, and guide you along every step of the process.

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