How Does a Reverse Mortgage Work in Ontario?

A traditional mortgage is a loan you receive from a lender to buy a home of your choice. The application process involves a review that examines many aspects of your finances, and securing a mortgage is considered a necessary step towards home ownership. With all that said, you may have wondered, what is a reverse mortgage, how does it differ from a traditional mortgage, and what’s the process behind securing it? We’ll explore all those questions and more in this post.

What is a Reverse Mortgage in Canada?

A reverse mortgage in Canada is a mortgage loan secured against a principal residence to access equity and does not require regular payments.  These types of loans are generally available to people who are 55 years of age or older, own a home, and are looking to borrow money from their equity, without selling or having large mortgage payments. It is a popular solution for older people who want to increase their bank balance with an income supplement, complete home renovations, travel, pay off debt, purchase a second property, provide living inheritances, and invest in new opportunities. Reverse mortgage funds can be used for virtually anything.

But how does a reverse mortgage work in Ontario, exactly? Let’s review the details of this type of loan together. 

How a Reverse Mortgage Works

Unlike a typical mortgage, where you may apply for a loan from a few different lenders, there are only two federally regulated banks in Canada that deal with reverse mortgages. These options are HomeEquity Bank, which provides The CHIP Reverse Mortgage® (once called The Canadian Home Income Plan) throughout Canada, and Equitable Bank, which tends to only work in major urban areas. Both require you to get Independent Legal Advice (ILA) and have a no-negative equity guarantee. As long as you meet your mortgage obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home.

If you choose to apply for a reverse mortgage, the process is slightly different than that of a standard mortgage. It is a favoured option for older Canadians because you still own your home, the funds you receive are tax-free and do not impact Old Age Security (OAS) or Guaranteed Income Supplements (GIS). 

Who Can Apply for a Reverse Mortgage?

To apply for a reverse mortgage in Canada, you must:

• Be a homeowner and use the property as your primary residence
• Be 55 years of age or older (for all individuals on the title)
• Own a detached home, condo, or townhouse in an eligible location
• Have sufficient home equity to support the loan

Reverse mortgages do not require income or credit checks, making them accessible to the older population and those on fixed incomes.

Understanding Reverse Mortgages in Ontario

A reverse mortgage, like a traditional mortgage, is a loan that uses your home as collateral —the security for the loan is your home.

For those 55 and older, you are able to access up to 55% of the value of your home in cash, and this cash is tax-free. The money you obtain through a reverse mortgage can be used for anything you desire, such as travel, paying off debt, giving an early inheritance to your family, renovations, and more.

With a reverse mortgage, there are no regular payments that are required.  Also, the reverse mortgage is paid off once your home is sold or you move.

Key Differences from Traditional Mortgages

• No monthly payments. Reverse mortgages don’t require monthly repayments; the balance is only due when you sell or move.
• Age-based eligibility. Only homeowners 55+ are eligible, which makes this type of mortgage ideal for retirees.
• Equity-based approval. Approval is based on the value and equity in your home, not your income or credit score.
• Tax-free funds. Unlike conventional loans, funds received through a reverse mortgage are not taxable and won’t affect government benefits.

Benefits of a Reverse Mortgage

Tax-Free and Benefit-Safe Income

All funds received through a reverse mortgage are completely tax-free and will not impact your eligibility for government retirement benefits like OAS or GIS. This makes it a powerful financial tool for retirees who want to boost their income without affecting government benefits.

You Have the Control

You remain in control of your home with a reverse mortgage.  In addition, with a reverse mortgage, there will never be a time when you have to sell or move if your ability to earn money or your home’s value changes.

Cash In Your Home

For many Canadians over 55, the bulk of their wealth is tied up in their homes. As your home increases in value and your original mortgage balance decreases, you build equity. A reverse mortgage allows you to tap into that equity without selling, giving you access to cash when you need it most.

Made in Canada

Reverse mortgages in Canada are backed by federally regulated Schedule I banks. Home Equity Bank, the leading provider of CHIP Reverse Mortgages, has been offering reverse mortgage solutions for over 30 years, ensuring a secure and trustworthy lending process tailored to Canadian homeowners.

Reverse Mortgage Eligibility Requirements

Unlike traditional mortgages, reverse mortgages don’t have any specific requirements regarding credit score or income. Instead, the eligibility evaluation is based on the applicant’s age and homeownership.

Age and Ownership Criteria

In order to be eligible for a reverse mortgage in Ontario and throughout Canada, you need to be 55 years of age or older and own your own home. If there is a mortgage on the home, it would be paid out with the proceeds of the reverse mortgage. 

Home Type and Residency Conditions

The property in question must be your primary residence, meaning that you live in it at least six months per year. Most detached homes, townhomes, and condos qualify – plus, in some cases, you may bundle additional properties to increase the total loan amount.

Joint Applications with a Spouse

All people on the title must be 55 years or older.  If you have a spouse, they must be at least 55 years old, and you must both be listed on the application. 

The Application Process

What Lenders Consider

After you submit your application, the bank will take into account several factors. They will look at your age along with the condition, location, and appraised value of your home, and they may review the terms of your current mortgage with your lender. 

How Much Can You Borrow?

You are able to borrow up to 55% of the value of your house, with no maximum. Older applicants can usually qualify for higher loan amounts.

What Happens After Approval?

If you receive approval for your application, you can choose to accept the total amount that the bank is offering you or a portion of said amount. However, you must first use the funds you receive to pay off any outstanding secured loans or lines of credit against your home. This includes your current mortgage. You can then use the remainder of the money to do what you wish.  Should you want to increase the sum you are borrowing at a later date, you can do so up to the amount the bank has offered, or you can refinance.

Accessing Your Funds

Depending on your financial goals and lifestyle needs, you can access the reverse mortgage funds in one of three ways:

1. Lump sum. You receive all available funds at once.
2. Scheduled advances. You receive payments monthly, quarterly, or annually.
3. Combination. You take a portion upfront and schedule the rest over time.

Using the Money from a Reverse Mortgage

There are no restrictions on how you use the money. You are free to use the reverse mortgage payments to pay off high-interest debt, invest in home renovations, cover healthcare expenses, or supplement your retirement income to maintain the desired lifestyle. 

Note that if you have any loans secured against your home, they must be paid off with the reverse mortgage proceeds first.

When Do You Need to Repay a Reverse Mortgage?

Repayment Triggers

Unlike a regular mortgage, you are not required to make monthly payments on this kind of loan. In fact, you don’t have to pay anything unless one of these three things happens:

• You sell or move out of your home
• The last borrower on the reverse mortgage dies
• You default on the mortgage obligations

The reverse mortgage company will ensure that the amount that needs to be repaid once your house sells or you move will never be more than the market value of your home. Also, if your home appreciates in value, this increase is yours.

What Happens If You Default?

Defaulting on a reverse mortgage typically means failing to meet the loan’s basic obligations, such as:

• Not keeping the home in good condition
• Failing to pay property taxes or home insurance
• Using the loan for illegal purposes

If you default, the lender may demand full repayment of the loan immediately. If you fail to do so, the lender may initiate legal action to recover the amount owed and even force the sale of the property.

Will You Lose Your Home with a Reverse Mortgage?

You will not lose your home with a reverse mortgage, as long as you adhere to the loan’s conditions and meet your borrower obligations.

Simple Obligations to Keep in Mind

As a borrower, you have simple and straightforward obligations that must be met.  As such, you must keep your property tax payments up to date, keep your residence in good order, live there for six months of the year, and adhere to the loan agreement.

Maintaining Eligibility Over Time

Maintaining your eligibility is simple – just continue to meet your obligations as a homeowner. If your living situation or health changes, and you end up moving into long-term care or moving in with relatives, the reverse mortgage will need to be repaid.

Can You Exit a Reverse Mortgage Early?

Early Repayment Fees and Exceptions

You can pay back the entire loan and interest at any time. However, if you choose to repay the full amount early, there is the possibility that you may have to pay an additional fee, which is different depending on who your reverse mortgage is with. 

Policies from Different Lenders

HomeEquity Bank does not charge fees if the contract ends due to the death of the last borrower and reduces the fee by 50% if an individual moves into a retirement or care facility.  Both lenders will charge three months’ interest, which could be a percentage or an interest rate differential. This depends on the length of time you have had the loan. 

Why Work with a Reverse Mortgage Broker?

The Value of Professional Guidance

If you think this type of loan may be ideal for you, you might be wondering how to apply for a reverse mortgage. An experienced mortgage broker, like me, can be of service. I am passionate about helping people secure all types of mortgages, whether that gets them into their first home, their fifth, or a reverse mortgage on a home that has been lived in for many years. I can streamline the application process in a way that is helpful, informative, and easy. 

Personalized Support Throughout the Process

Perhaps you are debating whether this is the right move for you, or you’re curious about other options available for younger homeowners. If you have any questions about getting a reverse mortgage in Ontario or any other province in Canada, reach out to me! I’d be happy to answer any questions you may have and provide personalized support throughout the process.