A reverse mortgage can be a good idea for Canadians 55+ who own their own home and are having a hard time meeting their cash flow needs during retirement. A reverse mortgage can supplement government pensions and retirement savings and is often used to cover unplanned medical expenses, home renovations, living expenses, or to consolidate debt and reduce debt payments.
In this article, we explain what a reverse mortgage is, how it works, the pros and cons, and when a reverse mortgage is a good idea to consider. We also discuss why HomeEquity Bank, the provider of the CHIP Reverse Mortgage, is the leading provider in Canada.
What is a reverse mortgage and how does it work?
A reverse mortgage is a loan secured against the value of your home. It is designed exclusively for Canadian homeowners aged 55 years and older. With a reverse mortgage, Canadian homeowners age 55+ can access up to 55% of their home value and turn it into tax-free cash, without having to make regular monthly mortgage payments. You get to stay in your home and don’t have to pay back the loan until you choose to move or sell or until the last surviving homeowner passes.
Are reverse mortgages good or bad?
Reverse mortgages can be a good financial solution for Canadian homeowners 55+ who wish to access a portion of their home’s appraised value as tax-free cash. However, it’s important to note that a reverse mortgage can diminish the equity in your home that would otherwise be passed down to your heirs. Like any financial product, there are pros and cons to using a reverse mortgage.
Reverse mortgage benefits
- You get to stay in your home.
- Maintain ownership and title.
- Access equity from your home without having to sell or downsize.
- No income requirements, making it easier to qualify for compared to other loans.
- The funds are tax-free and do not affect government pensions such as Canadian Pension Plan and Old Age Security.
- You may use the funds from a reverse mortgage to meet any of your financial needs, including debt consolidation, medical expenses, living costs, or helping your child with a down payment on a home. The choice is yours.
- You don’t have to make any monthly mortgage payments until you choose to move or sell.
- Despite interest on reverse mortgages coming in at a premium compared to conventional mortgages, they are often lower than credit cards, department store credit cards, second mortgages, and private loans.
Reverse mortgage drawbacks
- There are fees involved, including closing fees, and costs for independent legal advice and a home appraisal just like a conventional mortgage.
- Interest rates for a reverse mortgage can be higher than traditional mortgages or home equity lines of credit (HELOCS). However, recent Bank of Canada interest rate hikes have made the interest rates on these products comparable*.
- A reverse mortgage can reduce the equity in your home, leaving less of an inheritance for your heirs.
- Prepayment penalties apply, similarly to other home-secured debt.
Complaints about reverse mortgages
There are many myths and misconceptions about reverse mortgages, often driven by the loosely regulated reverse mortgage industry in the United States. In fact, reverse mortgages in Canada are highly regulated, and HomeEquity Bank, which was the first bank to offer reverse mortgages in Canada, is a federally regulated, Schedule 1 Canadian Chartered Bank.
Misconception #1: You no longer own your home
The reality: With the CHIP Reverse Mortgage from HomeEquity Bank, you continue to own your home, hold title, and have full control of your home, just as with a regular mortgage. The only obligations you have are to live in your home, keep it well-maintained, pay your property taxes and insurance and abide by our mortgage contract.
Misconception #2: You may end up owing more than your home is worth
The reality: Thanks to HomeEquity Bank’s No Negative Equity Guarantee**, homeowners will never owe more than the fair market value of the property when they move or sell. This is a very important safeguard in today’s uncertain economic climate. It ensures that if your home depreciates below the mortgage amount owing, HomeEquity Bank will cover the difference. In fact, over 99% of HomeEquity Bank’s customers have equity in their home when they come to sell it.
Misconception #3: Your heirs will lose the family home
The reality: Your children have the opportunity to pay off your reverse mortgage and keep the property after you pass away. The fact that you always retain title and ownership of your home, and that lending amounts are conservative – only 55% of home equity can be accessed – provide additional safeguards for you and your heirs.
Misconception #4: Interest rates are high compared to traditional mortgages
The reality: Interest rates for a reverse mortgage are a little higher than a conventional mortgage, but not excessively so. The slightly higher rates are due to the fact that you don’t have to make monthly mortgage payments for the duration of the loan.
When is a Reverse Mortgage a Good Idea?
There are many situations when a reverse mortgage is a sound financial option for Canadian homeowners. Today’s economic climate provides a good example. With inflation and interest rates remaining stubbornly high, many Canadians are struggling to meet their cash flow needs. Retired Canadians on a fixed income are facing rising expenses and worry that inflation will continue to erode the value of their savings and investments.
One way to deal with these realities is to cut back, reduce your expenses, and potentially affect your quality of life. Another option is to take on debt. Taking on debt can be stressful for retirees, especially in a higher interest-rate climate, as most loans and credit cards require minimum monthly payments at a time when cash flow is a challenge. Retired Canadians may also face difficulties accessing traditional loans due to a lack of employment income. Even home equity lines of credit require monthly payments and are best suited to homeowners with a regular income. In these situations, a reverse mortgage can be a better alternative and provide a safe and secure financial solution allowing you to access the tax-free cash that you need to live your desired lifestyle without having to drastically cut back or take on debt payments.
Another situation in which a reverse mortgage can play an important financial role is to help younger family members purchase a home. It can be a real challenge for younger people to enter the housing market. If you are a parent, you can use a reverse mortgage to provide a living legacy to a child or grandchild and, in effect, give them an early inheritance that you both can enjoy.
So, a reverse mortgage can help cover the cost of your living expenses and meet any of your other financial obligations, such as consolidating debt, paying for medical expenses, and home renovations or retrofitting. Plus, a reverse mortgage can help you stay in the home you love – a dream shared by more than 90% of Canadians.
Is CHIP Reverse Mortgage a good idea?
HomeEquity Bank is the leading provider of reverse mortgages in Canada and is dedicated exclusively to the financial needs of Canadian homeowners 55+. It continues to distinguish itself with its service, commitments, partnerships, and philanthropic activities.
- The CHIP Reverse Mortgage has been available since 1986 and has provided Canadian retirees with over 35+ years of trusted service.
- Canadian Mortgage Professional awarded HomeEquity Bank the 5-Star Mortgage Product Award for Reverse Mortgages for the second year in a row, and the CHIP Reverse Mortgage has also garnered a 5-star review from TrustPilot, an independent review platform.
- HomeEquity Bank has partnered with the Royal Canadian Legion to help Canadian Veterans retire on their terms, and with CARP, Canada’s largest non-profit, non-partisan advocacy dedicated to helping improve the quality of life of Canadians as we age.
- We also work with Ambassadors such as financial expert Pattie Lovett-Reid, figure skating 4-time World Champion and Canadian national champion Kurt Browning and other notable Canadians to help Canadians make the most of their retirement.
- HomeEquity Bank is committed to helping Canadian retirees protect themselves against fraud with helpful tips and advice and is an avid supporter of Personal Support Workers in all that they do to help Canadians age in place.
Learn more about how a CHIP Reverse Mortgage works and/or call us toll-free at 1-866-522-2447 to see how this retirement income solution can help you stay in the home you love.
*As at May 2023.
** Customers must maintain property taxes, and homeowners’ insurance and abide by their obligations under the mortgage contract. The guarantee excludes administrative expenses and interest that has accumulated after the due date.