How does a reverse mortgage work in Canada?

A reverse mortgage is a popular way to free up cash later in life. You can borrow a sum of money from your property’s equity, without losing your home.

We’ll take a look at everything you need to know about reverse mortgages. How does a reverse mortgage work in Canada? What are the pros and cons of Canadian reverse mortgages?

We’ll also look at Wise – your international money transfer alternative. Spend, send, and receive your money across the globe in over 40 currencies. Let’s dive in!

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Table of contents

What is a reverse mortgage? How does a reverse mortgage work in Canada? Who is eligible for a reverse mortgage? What banks offer reverse mortgages in Canada? Canadian reverse mortgage interest rates and fees Canada reverse mortgage pros and cons Reverse mortgage: Canada vs US Buying property abroad? Send money the hassle-free way with Wise How to apply for a Canadian reverse mortgage as an American Paying back a reverse mortgage in Canada Canada reverse mortgage FAQs

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What is a reverse mortgage?

In Canada, a reverse mortgage is a loan for homeowners aged 55 or older. You can borrow money from your home’s equity without selling the property – and you’ll typically get a tax-free lump sum in exchange.¹

Also known as equity release, you can borrow up to 55% of the appraised value of your home’s equity. You won’t pay your loan back until you move or sell – and you can use the money for whatever you want.²

Types of reverse mortgages

There are a few different types of reverse mortgages in Canada. You’ll need to choose the right interest rate, mortgage provider, and loan type for you.

Some reverse mortgages use a fixed rate of interest. This means your interest rate will stay the same during your mortgage term. However, if you take out a variable-rate reverse mortgage, your interest may fluctuate.³

Reverse mortgage interest rates are typically higher than a regular mortgage – and you won’t have a traditional amortization period. This means your interest can accumulate indefinitely over time.⁴

You’ll also need to think about open vs closed reverse mortgages. Open mortgages usually have more flexible repayment terms.

For example, you may be able to make additional voluntary payments towards your debt. Make sure to speak to your lender about your prepayment options.⁵

How does a reverse mortgage work in Canada?

So, exactly how does a reverse mortgage work in Canada?

You’ll need to apply for your mortgage through a bank or lender. Your provider can help you understand the value of your home and how much you can borrow.

When you take out a standard mortgage to buy property in Canada, you’ll pay off your full debt, plus any interest, in monthly increments.

For a reverse mortgage, however, you’ll receive a lump sum from your bank in exchange for equity in your home. You won’t have to pay back your loan each month – but the amount you owe will grow over time.

When you sell your property or die, the proceeds are used to pay off your reverse mortgage loan. You (or your beneficiaries) can keep any equity that’s left over.⁶

Who is eligible for a reverse mortgage?

You’ll need to meet certain eligibility requirements to get your reverse mortgage:

• You’ll need to be a homeowner aged 55 or older
• The property must be your primary address
• Your home needs to be worth at least 250,000 CAD

You may also need to pay off any outstanding loans secured by your home – and your lender may require you to get independent legal advice.⁶

What banks offer reverse mortgages in Canada?

HomeEquity Bank and Equitable Bank® are 2 of the most popular Canadian reverse mortgage providers. These lenders offer a range of mortgage types for Canadian homeowners.

The HomeEquity CHIP Reverse Mortgage lets Canadian homeowners release up to 55% of their home’s equity. You won’t make payments until you sell your property – and you’ll get your loan as a lump sum.⁷

Equitable Bank also offers a range of reverse mortgage products, including Reverse Mortgage Flex, Reverse Mortgage Flex Plus, and Reverse Mortgage Flex Lite.⁸

You may be able to get your money as an advance or opt for recurring payments, but you’ll need to live in a city or large town in British Columbia, Alberta, Ontario, or Quebec to qualify.⁹

Canadian reverse mortgage interest rates and fees

Your Canadian reverse mortgage rate will depend on your lender, but it should range from roughly 7% to 10%.¹⁰

Let’s take a closer look at HomeEquity Bank’s interest rates.

Term	Interest rate	Annual Percentage Rate (APR)
Variable	8.86%	9.23%
6 month	8.04%	8.38%
1 year	8.59%	8.95%
3 years	7.79%	8.12%
5 years	7.29%	7.61%¹¹

You can access a range of mortgage types and rates at Equitable Bank. Let’s take a look at Equitable Bank’s Reverse Mortgage Flex interest rates.

Term	Interest rate	Annual Percentage Rate (APR)
6 month fixed	7.94%	9.543%
1 year fixed	8.09%	8.761%
2 year fixed	7.74%	7.994%
3 year fixed	7.19%	7.323%
5 year fixed	6.59%	6.634%
5 year adjustable	P + 2.65%	8.713%

You may also need to pay setup fees for your reverse mortgage. For example, you’ll pay a 995 CAD setup fee for your Equitable Bank Reverse Mortgage Flex.⁸

Canada reverse mortgage pros and cons

It’s important to consider whether a reverse mortgage is the right choice for you. Let’s take a look at some reverse mortgage pros and cons in Canada.

Pros	Cons
You won’t have to make regular loan payments	You’ll typically pay a higher interest rate, compared to a regular mortgage
You’ll still own your home – and you can spend your lump sum on whatever you want¹	Your home equity may decrease as you accumulate interest¹
You won’t pay tax on the money you borrow	Your estate will likely need to repay your reverse mortgage when you die¹
You won’t have to pay the loan back until you sell your home or pass away¹²	You may have to pay setup fees, appraisal costs, and closing expenses for your mortgage¹⁰

Reverse mortgage: Canada vs US

There are a few key differences between reverse mortgages in the US vs Canada. Let’s take a look.

Canada	US
You can apply for a reverse mortgage from age 55	You can’t apply for a reverse mortgage until age 62¹³
You can borrow up to 55% of your home’s current value	You’ll need to discuss how much you can borrow with your bank. You may need at least 50% equity in your home to qualify¹³
In Canada, both spouses must meet the eligibility criteria¹⁴	In the US, only one spouse needs to qualify¹⁴
You’ll need to seek independent legal advice before you can get approval¹⁴	You may be able to get your reverse mortgage without independent legal advice¹⁴

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How to apply for a Canadian reverse mortgage as an American

Let’s take a look at how to get your reverse mortgage in Canada – a step-by-step guide for Americans.

Step 1. First, you’ll need to explore your options. Compare lenders and look into how much money you can qualify for

Step 2. Apply for your reverse mortgage. Your lender will ask for your personal information and you’ll need to give your bank permission to run a credit score

Step 3. Next, your lender will help you organize a property appraisal. This will determine your property’s value and how much you can borrow

Step 4. Submit a few documents to support your application, such as property tax statements, bank statements, and identity verification

Step 5. Next, you’ll need to sign a commitment from your lender. This will include your loan amount, interest rate, and term. You’ll also need to get independent legal advice for your reverse mortgage

Step 6. Finally, you’ll need to sign your reverse mortgage and pick a closing day. Once all the paperwork has gone through, you’ll get your funds¹⁵

These steps may differ depending on your background, finances, and individual circumstances. Consult a lawyer or real estate professional for further advice.

Paying back a reverse mortgage in Canada

Unlike a traditional mortgage, you won’t need to make regular payments towards your reverse mortgage loan.

Instead, you’ll repay the debt when you sell your home or die. However, you may be able to make voluntary payments towards your loan.

You’ll need to speak to your lender about your repayment schedule. Some banks will let you pay off your reverse mortgage early, but you may need to pay a fee.¹

Canada reverse mortgage FAQs

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What is the CHIP reverse mortgage?

CHIP® is a reverse mortgage product offered by HomeEquity Bank®. You can secure your debt against the value of your home and receive a lump sum towards retirement living costs, for example.⁷

Can I get a mortgage in Canada as an American?

Yes, you can get a mortgage to buy property in Canada as an American.

However, there are a few requirements. You may need to open a Canadian bank account – and you’ll need to meet your bank’s strict eligibility criteria.

What is the downside of a reverse mortgage?

Reverse mortgages can be risky. You could end up accumulating a large amount of interest on your loan – and your beneficiaries may need to pay off your debt.

You may also lose equity in your home. Make sure to seek independent financial and legal advice before applying for a reverse mortgage.

Do you lose your home with a reverse mortgage?

No, you won’t lose your home. A reverse mortgage lets you borrow up to 55% of your home’s equity, without losing control of the property.

This means you’ll still own your house, but you’ll need to pay back the loan if you ever sell it or move out.

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A reverse mortgage is a popular way for Canadians to borrow money later in life. You can use the loan for whatever you want, but it’s important to think carefully.

Consult a lawyer for support and research interest rates before applying for a reverse mortgage on your home.

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Sources

1. Canadian government - Reverse mortgages
2. CHIP Mortgages - How do reverse mortgages work in Canada?
3. Forbes - 15 things you should know before taking out a reverse mortgage
4. Turned Away - What types of reverse mortgages are offered in Canada?
5. Money We Have - Open vs closed mortgages
6. Forbes - Reverse mortgage pros and cons
7. HomeEquity - CHIP reverse mortgage
8. Equitable Bank - Reverse mortgage comparison and rates
9. Equitable Bank - Reverse mortgage
10. Money - How does a reverse mortgage work in Canada?
11. HomeEquity - CHIP reverse mortgage interest rates
12. Rate Hub - Reverse mortgages in Canada
13. Investopedia - Reverse mortgages: Canada vs the US
14. Reverse Mortgage Pros - Canada vs US
15. Reverse Mortgage Pros - Steps to apply for and receive a reverse mortgage

Sources checked 11.07.2024