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A reverse mortgage advances you funds from a house you own. Find out if this option is right for you.
More than ever, Canadians are relying on reverse mortgages—a “don’t-pay-till-you-die” option to borrow up to 55% of the appraised value of your home—and the trend is turning conventional wisdom about debt and retirement on its head. While past generations fought hard to avoid debt in their golden years, data from the Office of the Superintendent of Financial Institutions (OSFI)—the federal government agency that supervises and regulates banks, insurance companies, and trust and loan companies—confirms that reverse mortgages are on the rise in Canada, with over $8.2 billion in reverse mortgage debt outstanding at the end of June 2024 (the most recent data available at press time). That’s 18.3% higher than the same month last year, and 39.3% higher than two years ago.
If you’re considering a reverse mortgage as a way to fund or boost your retirement income, there’s a lot to consider. This explainer will take you through the ins and outs of reverse mortgages.
While a conventional mortgage advances you funds in order to buy a house, a reverse mortgage is just the opposite: It advances you funds from the house you already own.
Qualifying home owners—who must be age 55 or older—can borrow up to 55% of the value of their home (depending on the home’s value and type, and the ages and genders of the borrowers). To maintain eligibility for the loan, the borrower must maintain and remain in the house as their principal residence, pay the property tax bills and keep valid insurance in place, but there are no restrictions on the use of the funds once they’re in your hands. If one spouse dies, the surviving spouse is not required to repay the loan, as reverse mortgages are not “callable” (meaning, the lender cannot request repayment if the borrowing conditions are met).
When you’ve established a reverse mortgage, you receive funds tax-free, either as a lump sum or as regular monthly deposits. Interest accumulates on the loaned funds as they are received. The reverse mortgage becomes due when the last surviving owner dies, if the house is sold, or if the home owner or home owners move out of the home.
Today, there are three providers of reverse mortgages in Canada: HomeEquity Bank, Equitable Bank and Bloom Financial. (Seniors Money Canada, which came to the Canadian market from New Zealand in 2007, is no longer offering new loans.)
You can choose different terms for a reverse mortgage, ranging from six months to five years, depending on the provider. Rates vary—for a five-year fixed term, for example, Equitable Bank’s reverse mortgage rate is 6.59%; HomeEquity’s CHIP Reverse Mortgage rate is 7.29%; and Bloom Financial’s rate is 6.99%, as of late August 2024. Equitable Bank also offers an adjustable rate, and HomeEquity offers a variable rate.
If you’re thinking these rates are significantly higher than rates for regular mortgages—you’re right (and we’ll talk more about that in a moment). You may also have to pay a set-up fee, and other fees and closing costs.
HomeEquity offers reverse mortgages in all Canadian provinces; Equitable Bank offers them in cities and most large towns across Ontario, Alberta, British Columbia and Quebec; and Bloom Financial offers them in Ontario, Alberta and British Columbia. None of the three offers reverse mortgages in the territories.
Reverse mortgages, second mortgages and home equity lines of credit (HELOCs) provide three different ways to create cash flow from a house you own. Of these three options, however, only the reverse mortgage does not require both income to qualify and at least minimal monthly repayment during the borrowing term.
With a reverse mortgage, the existing home equity is used as security for the funds provided by the reverse mortgage. After the reverse mortgage is established, any future growth in the value of the house goes to the home owner. (If the home falls in value, the reverse mortgage lender takes the loss—the lender guarantees that the borrower will never owe more than fair market value of the home.)
Calculating the impact of the reverse mortgage on home equity thus becomes a function of estimating the term of the loan, the home’s value at the end of that term and the interest payable on the advanced funds.
The growth in reverse mortgages is part of a bigger picture of debt and housing wealth among Canada’s aging population. Statistics Canada data shows that debt for the over-65 crowd has increased sharply in recent years, with the proportion of indebted seniors growing by more than 50% from 1999 to 2016.
Over this period, the average increase in seniors’ debt was $50,000, of which fully 67% was mortgage debt. At the same time, however, the average increase in seniors’ assets was just over $500,000, of which 51.7% is attributable to real estate assets—meaning that seniors’ increased (mortgage) debt is, on average, moderated by their increased (real estate) assets.
HomeEquity Bank says their average customer is a 72-year-old who borrows $170,000 to pay down their debt and supplement their income. Reverse-mortgage funds could also be used to fund renovations that let you stay in your house longer, to help your child or grandchild with an “early inheritance,” to provide “bridge” financing if you wait to take Canada Pension Plan (CPP) or Old Age Security (OAS) benefits, or to pay for long-term care or long-term care insurance. And because the funds aren’t taxable when you get them, there’s no impact on government benefits that can be clawed back based on your taxable income, such as OAS and the Guaranteed Income Supplement (GIS).
The conventional wisdom on how to treat housing wealth in retirement has been to preserve it as a last-resort option, with reverse-mortgage lenders thus viewed as “lenders of last resort.” If housing wealth is not needed to help fund retirement, this view goes, the home can be left as part of the legacy for the next generation. As a result, it’s easy to find reverse-mortgage naysayers: former Minister of National Revenue Garth Turner famously quipped that reverse mortgages are “an ideal strategy, if you hate your children.”
The criticisms of reverse mortgages tend to focus on the rates, which are higher than comparable five-year mortgage rates and several percentage points higher than HELOC rates. Another focus of criticism is the overall indebtedness of seniors who may have few, if any, other options. This lack of options, however, is what puts reverse mortgages on the table in the first place: With lowered incomes in retirement, mortgages and HELOCs may be unavailable to many Canadians.
Simply selling the home to create the desired cash flow can present other problems, as the principal residence provides a source of tax-free compounding that is decreased by downsizing or eliminated by renting. As a result, a senior who wants to “age in place,” perhaps with the support of a reverse mortgage to cover home renovation or care costs, may find the reverse mortgage the best of their available options.
Looking backwards, the rise in reverse mortgages can be understood as Canadians’ collective response to lower costs of borrowing, gains in home equity, and reduced income security in retirement with the decrease in defined-benefit pensions.
Looking forward, whether you love ’em or hate ’em, with Canadians facing the need to cover the costs of retirement that may last well into our 90s and beyond, reverse mortgages may, in fact, be here to stay.
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While Reverse Mortgages are certainly a viable option for Canadian seniors requiring a lift in income due to inflationary pressures, they can also benefit high net worth people. By deferring the sale of investments which cause income tax payments to later in the retirement the investments can increase longer. Tax free funds from a Reverse Mortgage can also be used to buy Real Estate or other investments to increase wealth. A financial planner knowledgeable in Reverse Mortgage should be consulted.