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Many Canadians are “house rich.” Their net worth appears healthy (the average tops $675,000), but in reality, a large chunk—sometimes 50% or more—of that wealth is tied up in their homes. Factor in the nation’s growing personal debt (according to Statistics Canada, we collectively owe $1.77 for every $1 in disposable income), and it isn’t surprising that interest in reverse mortgages is growing.
A reverse mortgage is one of several options we have for borrowing money against a home’s equity. (Your equity is the present-day value of your home, minus mortgage principal or other debt tied to your home that’s remaining to be paid down.)
In the past, reverse mortgages were viewed with skepticism; a loan you don’t have to repay as long as you live simply seems too good to be true. But for Canadians in specific financial circumstances, a reverse mortgage can be a practical solution.
This guide looks at how reverse mortgages work, and which types of people could benefit from them, to help you decide whether it might be a good option for you.
What is a reverse mortgage?
A reverse mortgage is a financial product that allows you to borrow from the equity in a home you own, while continuing to own it and live in it.
In Canada, if you’re age 55 or older, you live in your home for more than six months of the year, and your home is appraised at the lender’s minimum required amount or higher, you are eligible to borrow up to 55% of its value. For example, Equitable Bank, which is one of only two financial institutions currently offering reverse mortgages in Canada (specifically in British Columbia, Alberta, Ontario and Quebec), stipulates that the borrower’s home value be at least $250,000, and your reverse mortgage principal (the amount you borrow) must be at least $25,000. There are no monthly repayments required until the mortgage is due.
You can get a reverse mortgage even if you already hold a conventional mortgage on your home. However, once you receive the money from your reverse mortgage, you must use a portion of it to pay off your previous mortgage, along with any other liens (debts attached to the property). This ensures the reverse mortgage lender is your first priority for repayment, when that time comes.
How does a reverse mortgage help homeowners access funds?
Homeowners who qualify for a reverse mortgage can receive the funds in the following ways: