The reverse mortgage market continues to surge in popularity in Canada, yet it’s often misunderstood how a reverse mortgage gets paid back.
Since a reverse mortgage is indeed a mortgage product, it’s easy to be confused by the fact that it doesn’t require monthly payments, unlike a traditional mortgage.
Naturally, questions about how to pay back a reverse mortgage are common, so this article will address those most frequently asked
Do you make monthly payments on a reverse mortgage?
For as long as you remain in your home, absolutely no payments are required, as long as you meet all of your mortgage obligations.
Mortgage obligations can include paying your home insurance and property taxes, and keeping your home in good repair. Failing to meet these guidelines may cause you to default on your loan.
Can you make payments, if you wish?
While monthly payments aren’t required on a reverse mortgage in Canada, you can choose to make principal and interest payments. Most reverse mortgage customers prefer to not make regular payments, so that they can take full advantage of the income supplement provided by the tax-free proceeds. You will need to discuss monthly payments with a reverse mortgage specialist to learn more.
When do you pay back a reverse mortgage?
Once you’ve paid your reverse mortgage closing fees (i.e. set-up fee, appraisal fee, lawyer fees), no payments are required on the balance of your reverse mortgage until you leave your home.
More specifically, you’re required to repay your balance when:
- You sell your home
- You move out of your home
- You default on your reverse mortgage
- The last borrower moves into long-term care or a retirement residence
- The last borrower passes away
How do you receive reverse mortgage funds?
On top of no required monthly payments, reverse mortgages come with flexibility around how you’d like to receive your funds.
Depending on what type of cash flow works best for you, you can choose to receive:
- The full amount in a one-time lump-sum
- A partial lump-sum with the rest paid out over time by request
- Recurring/scheduled advances
To learn more, read about our different types of advances and how they work.
How does interest work, and how do you reduce it?
Interest rates for reverse mortgages are generally higher than those for traditional mortgages, as the lender is typically not paid back until the end of the loan. Interest accrues over time, and the interest costs will be added to your reverse mortgage by your lender.
If you’d like to reduce interest accumulation, you’ll likely prefer to opt for a partial lump-sum advance or regular scheduled advances, as the single lump-sum advance will incur interest on the entire amount. Some lenders, like Equitable Bank, allow you to make monthly payments without incurring prepayment charges.
Can you pay off a reverse mortgage early?
If you prefer to prepay all or a portion of the principal owing on your reverse mortgage, you may do so, but depending on your lender, you’ll likely incur prepayment charges. These charges may vary widely—at Equitable Bank, reverse mortgage customers receive prepayment privileges that allow you to prepay your principal or interest without being subjected to a prepayment charge.
Even if you don’t intend to prepay your reverse mortgage, it’s wise to consider your lender’s prepayment terms, as unexpected events can arise, and it’s best to be prepared.
What happens if my spouse passes?
In the unfortunate event that your spouse passes away, you as the survivor can remain a borrower, which entitles you to all the benefits of your reverse mortgage.
Will I owe more than my home’s value?
In Canada, reverse mortgage customers are protected by a “No Negative Equity Guarantee.” This means that as long as you meet your mortgage obligations, the amount owed to your lender on the due date will not exceed the property’s fair market value.
“Fair market value” is defined as the amount that would be paid on the open market, on the applicable date, to buy the property, as long as there are no legal claims against the property. A certified home appraiser would establish the value of your property.
What do I have to pay on the balance due date?
When your reverse mortgage balance is due, you’ll need to pay the following:
- Principal and accrued interest
- Default expenses (if any)
- Fees and costs
- Prepayment charge (if any)
It’s important to do your own research, seek professional financial advice, and compare lenders. Although reverse mortgage terms across lenders in Canada have many similarities, there are also significant differences between interest rates, administrative fees, prepayment charges, and ultimately what you’ll owe on your balance due date.
If you decide a reverse mortgage is right for you, once you tap into your hard-earned home equity, you’ll no longer need to worry about monthly payments—your only concern should be how you’ll use your tax-free funds.