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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?
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 at borrowing money from its 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.
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 which means 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).
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. This property also needs to be your primary residence, you are able to bundle other properties to increase your borrowing amount. All people on the title must be 55 years or older. If you have a spouse, they must be at least 55 years or older and you must both be listed on the application. There are no specific requirements regarding your credit score or income in order to apply for this kind of mortgage, including previous bankruptcy.
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. You are able to borrow up to 55% of the value of your house, with no maximum. The older your age usually means that you would qualify for higher funds.
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.
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:
As a borrower, you have simple and straightforward obligations that need to be met. For example, you must keep your property tax payments up to date, keep your residence in good order, it must be your primary residence (which means you live there for six months of the year) and adhere to the loan agreement.
Yes. 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. 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.
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.
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 help.
Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.
Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.
