How Does a Reverse Mortgage Work in Canada?

Eligibility

In order to be eligible for a reverse mortgage in Canada, you must be at least 55 years old and own your home. You must also have sufficient equity in your home to cover the mortgage.

Typically you can expect to access up 55% of the value in your home. Although sometimes it may be possible to get a little more.

How it works

The basic premise of a reverse mortgage is that the homeowner takes out a loan against the equity in their home. This loan is typically paid out in a lump sum, or in monthly payments. The homeowner does not have to make any payments on the loan as long as they remain in the home. This means that a reverse mortgage can be a great way to supplement retirement income or to pay for things like medical expenses or travel.

In Canada, reverse mortgages are often used to refinance an existing mortgage and to provide additional funds to pay off high-interest unsecured debt. The loan and any accumulated interest must be repaid when the home is sold or the homeowner moves out, and the repayment is usually taken from the proceeds of the home sale. If the homeowner passes away, the loan must be repaid by their estate or heirs.

Benefits

Some other features and benefits of a reverse mortgage to consider include:

Flexibility: With a reverse mortgage, homeowners have the option of receiving the proceeds as a lump sum or as monthly payments.

Minimal Credit and income requirements: Due to the lack of credit and income requirements, reverse mortgages are accessible to more homeowners as long as they have a fair amount of equity in their home.

Remaining in the home: Reverse mortgages allow homeowners to remain in their homes and maintain ownership. If you have a strong emotional attachment to your home or cannot afford to move, this can be especially important.

Maintaining financial independence: Using a reverse mortgage gives homeowners access to their equity without having to sell or take on additional debt that requires regular payments, which can reduce stress and improve quality of life for homeowners.

Improved monthly cash flow when consolidating debt: When homeowners consolidate high-interest debt with a reverse mortgage, they can significantly improve their cash flow. This is especially beneficial for people on fixed incomes. 

Funds received are tax-free: The loan proceeds from a reverse mortgage are tax-free, so homeowners don't have to worry about paying taxes on the funds they receive.

Useful if facing unexpected medical expenses: Medical expenses can be a major financial burden, especially for people on fixed incomes. In order to cover these expenses, homeowners can take out a reverse mortgage without selling their home or incurring additional monthly debt repayment obligations. As a result, homeowners can focus on their health and well-being, reducing stress and financial strain.

Overall, a reverse mortgage can give homeowners financial security and peace of mind, allowing them to enjoy retirement more confidently.

Drawbacks

There are several disadvantages to consider when considering a reverse mortgage. One major disadvantage is that the interest rates on reverse mortgages tend to be higher than those on traditional mortgages. This can result in higher overall borrowing costs and a larger loan balance over time.

Another disadvantage is that closing costs for a reverse mortgage may be higher than those for a traditional mortgage. These costs can include lender fees, third-party fees, and insurance. This can add up to a significant expense upfront and may be difficult for some homeowners to pay.

Additionally, reverse mortgages require the homeowner to maintain the property and pay property taxes and insurance. If the homeowner fails to meet these obligations, they may be at risk of default and losing their home.

Finally, it's important to note that a reverse mortgage is a loan that must be repaid when the homeowner sells the property or passes away. This means that the homeowner's estate or heirs may be responsible for repaying the loan, which can impact their financial situation.

Conclusion

In conclusion, a reverse mortgage is a loan that homeowners over the age of 55 can take out using the equity in their home as collateral. This loan can be used to supplement income, pay for unexpected expenses, or simply access the equity in their home. While reverse mortgages offer several benefits, such as flexibility, minimal credit and income requirements, and tax-free proceeds, they also have drawbacks, including higher interest rates and closing costs compared to traditional mortgages. It's important for homeowners to carefully consider the pros and cons of a reverse mortgage before deciding if it is the right financial option for them.