A reverse mortgage is one great way older folks can use in getting 55% of the current value of their primary residence in the form of cash without having to sell or refinance their property especially when they're older than 55 years old.
If you're an older person from the age of 55 and above and you're wondering how reverse mortgages work in Canada, then this guide is for you.
In today's article, I'll be covering everything you'll need to know regarding a reverse mortgage and how you can take advantage of it.
In Canada today, reverse mortgages have become pretty popular and folks above the age of 55 are accessing equity that they have accrued in their homes.
According To Nerdwallet. One of the largest mortgage providers in the country known as HomeEquity Bank made a public application showing that the company has originated $1 Billion in new loans as of 2022, and ever since they have experienced over about 30% increase.
One of the great things you need to understand when it comes to reverse mortgages is the peace of mind that comes with it. As a property owner, you can enjoy financial flexibility and peace of mind as a retired homeowner who is living on a fixed income.
With all of that said, let us look at what reverse mortgage is in deep and the things you need to consider before thinking about contacting a reverse mortgage lender in your state.
Also Read: How You Can Get a Government Job in Canada in 2025 (Learn How)
What Is a Reverse Mortgage (Understanding Reverse Mortgage)
A reverse mortgage is known as a loan that allows home equity to be used in exchange for cash.
As a homeowner who needs some urgent money to finance something or even solve some financial predicament, you can use a reverse mortgage to borrow the money you need, depending on the amount of equity you currently have, and pay back the amount you borrowed when your property is sold.
The reason why this mortgage is called a "Reverse" Mortgage is due to the fact that it reduces your equity rather than increasing it.
As an advanced individual who is retired, I believe you understand the limitations you have when it comes to borrowing money especially if you're not interested in selling that precious home of yours due to the memories you've built in that house. The truth is, when it comes to pulling out equity through refinance, the feasibility is usually minimal if your retirement income can not support a new round of mortgage payments.
When you're in such a situation, the only best option is a reverse mortgage because it can help in providing you the desired cash while also allowing you as a homeowner to retain possession of an appreciating piece of real estate.
Who Are Those Offering Reverse Mortgages In Canada?
There are a lot of companies out there offering reverse mortgages. However, there are two major reverse mortgage providers in Canada. These are Home Equity Bank which started offering reverse mortgages around the year 1986 and Equitable Bank which was founded in the year 1970.
These two banks are known to be Schedule 1 banks and they do not have any physical branch you can walk into to perform a transaction.
One thing I'd like you to understand is that the HomeEquity Bank reverse mortgage products are usually made available from the company directly through all of Canada's major banks, credit unions, mortgage brokers, and financial planners.
On the other hand, Equitable Bank reverses mortgage products are made available through different independent brokers who are into the service of rendering reverse mortgages.
The service of the HOmeEquity bank is available in almost all of Canada except for three provinces. When you look at that of the Equitable Bank, you will find out that they only lend on homes that are located in certain areas of British Columbia, Alberta, Ontario, and Quebec.
What Are The Types Of Reverse Mortgages?
Just like the usual mortgages you know. The reverse mortgage also comes with its own type of reverse mortgage. These are the open and closed mortgage agreements. When presented with the options, you need to be sure you understand how both work and decide on which of the mortgages you're going for. Whether you prefer a more variable one or a fixed mortgage rate, it all boils down to you.
One thing you need to know about these two mortgages is the way money is received. Some of the products allow you to have access to your entire mortgage amount upfront while the other mortgage combines an initial lump sum payment with smaller withdrawals which you can either schedule or get paid depending on your discretion
How Does Reverse Mortgage Work in Canada?
Being able to understand reverse mortgages is very vital step that is needed if you must take advantage of it. This is why you need to know the requirements that make you eligible, the interest rate you're expected to pay, and how the money is going to be paid to you.
With that also said let us look at the eligibility requirements and interest rates of reverse mortgages in Canada in 2023
Reverse Mortgage Eligibility Requirement
With the different reverse mortgage product options out there, they all have their differences, but in a streamlined way, the common eligibility requirements are:
- You must be within the age range of 55 years and above.
- You must be a homeowner and must be living in it as the principal resident.
- Your home must be worth at least $250,000 and above.
How To Apply For a Reverse Mortgage In Canada
The application process for a reverse mortgage in Canada is pretty easy and straightforward.
To start your application process for a reverse mortgage, you must begin by completing an estimate on the lender's website you're using to get the loan. This will help you get a better view and understanding of how much you can borrow.
Your credit score plays a very important role when it comes to getting a loan through a reverse mortgage. When you apply for a loan, the lender will take a deep look into your credit score and credit history to determine if they can lend you money or how much you can get.
Below are some of the things most lenders put into consideration aside from credit score before granting you the loan.
- Your Age
- The location and condition of your home.
- Your home’s appraised value.
The information above is very vital during your application and you must ensure they are accurate. Some lenders will ask you to get legal advice regarding a reverse mortgage so you can be sure of what you're doing. In many cases, they'll ask you to present a proof of document showing that you actually consulted with a legal practitioner before taking the loan.
What Are The Interest Rates And Fees Of Reverse Mortgage In Canada?
Among all of the mortgages out there, a reverse mortgage is one that is usually on the high side.
The reason why this is so is due to the fact that they don't have the typical amortization schedule. This makes the interest accrue indefinitely and ends up eating more of your home equity.
The interest of reverse mortgage from the HomeEquity Bank CHIP as of 9th August 2023 is within the range of 7.49% (8.02% APR) to a variable rate of 9.65% (10.06% APR).
As of 9th August 2023 also, Equitable Bank’s reverse mortgage rate is within the range of 7.24% (7.264% APR) on a five-year fixed-rate loan to 8.73% (10.26% APR) on a six-month fixed-rate loan.
Looking at the rate above, you'll realize that both of these reverse mortgage companies charge their separate fees.
The Equitable Bank has a mortgage fee of up to $995 for just a set. This fee also covers any legal fees or home appraisal charges you may incur when you're making the application. The bank also has a closing and administrative cost of $1,795 for its CHIP products but this may differ based on your circumstances.
How To Receive Your Reverse Mortgage Funds In Canada
In other, for you to get your reverse mortgage funds, you'll need to pass the approval process. Upon approval for a reversed mortgage, you'll have access to as much as 55% of the value of your home equity. At this point, you can decide to receive your money either as a single lump sum or as a combination of an initial advance, while smaller payments are then spread out over time deciding which method is best for you to solve your financial needs.
Conclusion
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For any questions or inquiries you may have regarding how reverse mortgages work in Canada, you can drop them in the comment section. We'll be happy to answer them. Thanks for stopping by!!
