In Canada, reverse mortgages are gaining popularity among older homeowners looking to increase cash flow in retirement, while remaining in their homes.
If you’re aged 55 or older and own your home, a reverse mortgage offers a simple and safe way to access up to 59% of your home’s equity, without having to move or sell.
The funds released can be used for paying off a conventional mortgage, improving cash flow, or helping family. No monthly payments are required, and you only pay off the mortgage balance when you sell or move, default, or pass away.
As with any major financial decision, it’s important to be informed. Let’s explore the pros and cons of the reverse mortgage in Canada, so you can decide whether this unique financial solution is right for you.
Advantages of a reverse mortgage
No monthly mortgage payments required
Reverse mortgages allow you to access tax-free cash without the need to make monthly mortgage payments. This can significantly improve monthly cash flow, and provide financial relief and flexibility, particularly if you’re retired and living on a fixed income.
Flexible qualification requirements
Reverse mortgage eligibility is based on age, home value, property type, and location, making it an ideal solution for retirees who may not qualify for other loans.
Personal loans and lines of credit often have stricter income requirements, as they require monthly payments.
Your home remains yours
You continue to own your home, as long as you meet your mortgage obligations, which includes keeping your home in good repair, and paying your insurance and property taxes.
Homeowner protections
In Canada, reverse mortgages come with protections, such as the “no negative equity guarantee,” which ensures you’ll never owe more than the fair market value of your home, as long as you meet your mortgage obligations.
Additionally, spousal protection ensures one borrower can remain in the home if the other borrower passes away. This means they do not have to requalify for the reverse mortgage or find a new place to live.
Independent legal advice
Reverse mortgage lenders require applicants to receive Independent Legal Advice (ILA) by an independent lawyer. This added protection ensures you understand the terms and conditions of your reverse mortgage, are of sound mind and judgement, and that you are not being pressured to sign the mortgage documents.
To learn more, visit our ILA guide.
Multiple advance options
Whether you’re looking to consolidate debt, cover an immediate expense, or supplement your monthly income, you have options for how you’d like to receive your reverse mortgage funds: in one lump sum, as ongoing monthly payments, or a combination of both—offering flexibility to meet your specific financial needs.
Flexible prepayment options
If you choose, you can make interest payments or lump-sum prepayments, in order to pay down the principal owing on your reverse mortgage, subject to certain conditions.
To learn more, read about our prepayment options here.
Do what you wish with your tax-free funds
What you do with your reverse mortgage funds is up to you! You can pay off your conventional mortgage to wipe out mortgage payments, renovate or refurbish your home, cover healthcare costs, gift money to a family member, travel, or simply supplement your retirement savings.
Ease cash flow in retirement
Given the rising costs of living, many Canadian retirees feel the pinch on their cash flow and face having to return to the workforce.
As Old Age Security and Canadian Pension Plan income is often not sufficient enough to meet today’s economic realities1, a reverse mortgage can act as a valuable supplement by allowing you to convert up to 59% of your home equity into tax-free cash—all while staying in the home you love.
Disadvantages of a reverse mortgage
Accumulating interest
One reverse mortgage disadvantage is that interest on the loan accrues over the life of the loan, resulting in a growing loan value.
While interest does accrue, it's important to understand that a reverse mortgage is a non-recourse loan—in other words, should you default on a reverse mortgage, the lender cannot pursue any additional assets other than your home.
Thanks to protections like the No Negative Equity Guarantee, the borrower will never owe more than the fair market value of the home. While home values can fall, historically they’ve increased over time in Canada. Should your home’s value increase, it can help to offset the interest accruing on the loan.
Higher interest rates
Interest rates are typically higher than those of conventional mortgages and lines of credit. This is a result of several benefits passed on to the consumer, including the fact that a reverse mortgage doesn’t require payment until it becomes due. As the lender won’t see payment for the lifetime of the loan, they ultimately take on more risk.
Prepayment charges
With a reverse mortgage, once your interest rate term resets, you cannot prepay more than your prepayment privileges allow, without additional charges.
Although regular payments aren’t required until the reverse mortgage becomes due, you have the option to make prepayments toward the principal or interest. However, at Equitable Bank, homeowners can take advantage of prepayment privileges that help to reduce the amount of prepayment charges, which can be calculated here.
You can read more about our prepayment charges and privileges here.
Impact on inheritance
The loan amount, including accrued interest, fees, and charges, may reduce the inheritance left to your heirs.
Your heirs have the option to repay the reverse mortgage and keep the home or sell the property to settle the debt. Once the home is sold, the remaining equity still belongs to them.
Market fluctuations
Similar to many Canadians, if you’re looking to stay in your home for longer, the fluctuations in the housing market may impact your home equity.
While a dip in your home’s value can aversely affect your home equity, the reverse mortgage has a built-in safeguard, called the “no negative equity guarantee” that guarantees you’ll never owe more than the fair market value of your home, as long as you meet your mortgage obligations.
It’s important to weigh the pros and cons of a reverse mortgage to best identify if it’s the right solution for you. While a reverse mortgage can offer financial freedom and flexibility, it's equally important to be aware of any potential disadvantages.
By understanding both sides of the coin, homeowners can make informed decisions that align with their financial goals and circumstances—and that ultimately lead to peace of mind.
Ready to find out how much tax-free cash you could access?
Try our reverse mortgage calculator or call us today with no obligation at 1-866-576-0374
1Drost, P (2023, June 8). Canadians are working past retirement, but not because they want to. CBC.