How Does A Reverse Mortgage Work In Canada - 8Twelve

CHIP Reverse Mortgage Canada

Reverse mortgages are becoming increasingly popular in Canada, where there is a larger demographic finding themselves ‘cash poor but house rich’ and are looking for additional cash but with a wish to stay in their home and not sell it. For this group, reverse mortgages are a great fit.

 
 
 

What is a Reverse Mortgage?

A reverse mortgage is a special mortgage only made available to people in Canada over the age of 55.

It gets it’s name from the fact it is almost the opposite (or ‘reverse’) of a traditional mortgage – in that there is no credit score requirement, you don’t need income to qualify and there are no monthly payments.  The lender is paying you money, without the requirement that you repay any of it – which is why it is considered the ‘reverse’ of a traditional mortgage.

Advantages of a CHIP reverse mortgage in Canada

Tax-Free

Absolutely tax free money!

There are literally no taxes to be paid on the money received, since it is still technically a loan.
Keep Your Home

Keep your home no matter what

You get to stay in your home for life – there is no way a reverse mortgage can cause you to lose your home.
No Payments

No monthly payments required

There are no monthly payments. The lender is paying you money, without the requirement that you repay any of it
Credit Score

Credit score not required

No income or credit score is required to qualify

 

Things you need to know when considering a Chip Reverse Mortgage

 

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Here are a few things to consider with a reverse mortgage:

  • The interest rate is slightly higher than a Home Equity Line Of Credit (HELOC) and much higher than a traditional mortgage. However, not anywhere as high as an unsecured line of credit (credit line), personal loan or credit card.
  • Moving home – if you ever wanted to – is slightly harder, as now you have to discharge a mortgage.  Note that this is the same process with any mortgage or HELOC though.
  • Assuming that you spend all the money, or you aren’t simply replacing one mortgage with another, you are potentially reducing the size of your estate.  This would also assume that home equity growth doesn’t outpace interest accumulation – which is often not the case because of how the mortgage is structured (that the maximum equity withdrawal is 55%).
  • You may not qualify for the full 55%. The amount you qualify for depends on your age, the property type and property location. The lender obviously favours properties in urban areas that are easy to sell – in case this is what they have to do to get their money back once the home owners pass away.

Speak to our mortgage professional for help understanding the specific advantages or disadvantages that apply in your particular situation. Basically, you have to take on a slightly higher interest rate on the mortgage to get all the benefits of a reverse mortgage.  However, the interest rate is still not as high as an unsecured line of credit, personal loan or credit card.

The lender makes their money if and when the owners pass away and the house is either sold or re-mortgaged to pay back the loan – plus interest.

The best way of thinking about this is that with a traditional mortgage, amortization periods can be 25 to 30 years – so it can be 25 to 30 years before the lender gets their money back in full.  A reverse mortgage is following the same concept – long term lending.  Except that the lender won’t get their money back until all home owners pass away.

Is A CHIP Reverse Mortgage Right for you?

We recommend you speak to a mortgage professional to understand and apply the criteria to your situation and help understand if you are a good candidate for a reverse mortgage.  

The most important elements that would make you a good candidate for a reverse mortgage or not (assuming you meet the other criteria – that you are over 55 years old) follow:

1. Do you need additional cash?

– either by getting the money directly or through not having to pay your monthly mortgage/line of credit/credit card bills every month?  Reverse mortgages are best suited to people in need of cash or a reduction in their home loan bills.  If you don’t actually need the cash or to pay off any existing home loans, then getting an emergency line of credit or Reverse Mortgage Line Of Credit might be a better option.

2. Are you looking to stay in your home for life?

 Again this is a big consideration, as reverse mortgages are mainly intended to help you stay in your home for life.  If this is not important to you, then you might consider selling your home and downsizing as another option.

While these may be the biggest reasons why someone would be a good candidate for a reverse mortgage, there may be other factors to consider; speaking to a mortgage professional will help.

Reverse Mortgages have been in Canada since 1986, and since that time they have been helping Canadian homeowners access their home value in a way that a typical mortgage does not. Reverse mortgages have the reputation and stability that homeowners want so that they can be comfortable knowing that their home equity is being put to good use. You will never be forced to sell your home. Ever. No matter what anyone tells you.

Reverse Mortgages have had a great history in Canada and with more Canadians reaching retirement age, they will continue to gain in popularity as a great way for older Canadians to use the value of their home.

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