Did you know there's been an 18% increase in reverse mortgage borrowing since last year?

If you're here, there's a good chance you're a homeowner planning their retirement income streams, and you're probably wondering:

• What is a reverse mortgage, and how does it work, step by step?
• What are the pros and cons?
• Why are more people getting them?
• How does it affect my estate planning and retirement?

Well, what a coincidence — that's precisely what we cover in this A-to-Z guide. Read on to get all those answers and more.

By the way… already know you want a reverse mortgage, you just need to find the right one? Lotly can help. We work with 50+ lenders across Canada to find you the best loan rates and options, personalized for your financial goals. Book a free consultation today to get started.

What is a reverse mortgage?

In Canada, a reverse mortgage (sometimes called equity release) is a type of loan available to homeowners aged 55 and older that allows them to access a portion of their home equity without having to sell or move out.

The loan is secured against the value of the home and does not require any immediate payments, with the full amount being repaid when the homeowner sells or moves out of the property.

ELI5, 25 & 50

ELI5 means 'Explain Like I'm 5'. Since reverse mortgage loans can be a tricky financial concept to wrap your head around, we'll explain at three levels of increasing detail:

• ELI5: Know you’re going to sell your house some day? A reverse mortgage lets you spend the proceeds from the sale now, through a loan you’ll pay back when you move out.
• ELI25: For homeowners 55 or older, a reverse mortgage allows them to borrow money against their home's value without making any payments until they sell or move out. It's called 'reverse' because instead of making monthly payments on a traditional mortgage loan, the homeowner receives money from the lender.
• ELI50: A reverse mortgage is a financial product that allows homeowners aged 55 and over to access a portion of their home's equity as tax-free cash. The property secures the loan and does not require any immediate payments, with the full amount being repaid when the homeowner sells or moves out. It can be a valuable option for retirees looking to supplement their income or cover unexpected expenses in retirement.

How does a reverse mortgage work (example)?

Applying for a reverse mortgage

1. Consider your options: Meet with a mortgage broker or lender who offers equity release to discuss your options and eligibility.
2. Complete an application: Provide necessary documentation, such as proof of age, property ownership, and income.
3. Home appraisal: The lender will conduct a home appraisal to determine the maximum loan amount that can be borrowed.

Disbursement of funds

1. Receive your funds: Once approved, the homeowner can choose to receive the funds in a lump sum, regular installments, or a combination of both.
2. Fees: Interest is charged on the amount borrowed and is added to the overall loan balance over time.
3. Continue living as usual: The homeowner retains ownership of the home and can continue living there without any restrictions.

Repayment

Repayment of a reverse mortgage typically occurs when the homeowner sells the property, moves into long-term care, or passes away. Here is a step-by-step example of how the process works:

1. Loan maturity: The reverse mortgage becomes due when any of the triggering events occur, such as the homeowner deciding to sell the property. At this point, the lender will notify the borrower or their estate of the amount owed.
2. Property sale: The homeowner lists the property for sale. The proceeds from the sale are used to repay the loan balance, which includes the principal amount borrowed, accrued interest, and any applicable fees.
3. Full repayment: Once the property is sold, the reverse mortgage loan is fully settled. If the sale proceeds exceed the loan amount, the excess funds remain with the homeowner or their estate. If the sale proceeds cannot cover the loan because the property value declined, some reverse mortgages come with a “non-recourse” clause. This means the lender cannot claim more than the home's market value at the time of repayment.
4. Clearing liens: After repayment, any liens placed on the property by the lender are cleared, ensuring the reverse mortgage no longer encumbers the home.
5. Documentation and closure: The lender confirms repayment, and the transaction is finalized, leaving the homeowner or their estate free of any further obligations regarding the reverse mortgage.

How much money can you borrow through a reverse mortgage?

When applying for reverse mortgages in Canada, the amount of money that you can borrow through a reverse mortgage is determined by several factors, including:

• The borrower's age
• The value of the property
• Current interest rates

Generally, the older the homeowner and the more valuable their property is, the more they can borrow. Homeowners aged 55 years and above can usually borrow up to 55% of their home's appraised value.

As an added benefit, if you were considering a reverse mortgage to supplement your retirement income, you'll be happy to know it does NOT affect your Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.

How can you receive payments from a reverse mortgage?

There are several ways in which homeowners can choose to receive payments from a reverse mortgage:

• Lump sum: A single payment of the entire loan amount is received upfront. As such, you'll pay interest on the whole loan — if you don't plan on using all the money, this might be a needlessly pricey way to borrow.
• Installments: Regularly scheduled payments over a set period or until the loan balance is used up. Often, this is $1,000 monthly or $3,000 quarterly — you'll probably also need to take out an initial advance.
• Combination: You can combine the above options to best suit your needs and financial goals.

Interest accrues on any money that is borrowed from the reverse mortgage. Homeowners can pay back some or all of the interest and principal at any time — but you’ll want to ensure there’s no penalty.

Eligibility requirements for getting a reverse mortgage

In Canada,  to be eligible for a reverse mortgage, homeowners typically must meet the following criteria:

• Be at least 55 years old
• Have significant equity in their home
• Own and live in the property as their primary residence (meaning you live here 6 months out of the year).

Certain types of properties, such as rental properties or vacation homes, may not qualify for a reverse mortgage.

Why would you get a reverse mortgage?

There are a variety of reasons why homeowners may choose to get a reverse mortgage, including:

• Supplementing retirement income: Enquiry release can provide additional funds for retirees on a fixed income.
• Paying off debts or unexpected expenses: Homeowners can use the funds from a reverse mortgage to pay off high-interest debts or cover unexpected expenses.
• Making home renovations: Some homeowners may choose to use the money from a reverse mortgage to make necessary home improvements or modifications.
• Funding healthcare costs: As individuals age, healthcare costs tend to increase. A reverse mortgage can help cover these expenses.

Homeowners should carefully think about their financial goals and whether a reverse mortgage aligns with those goals — as we'll see, a reverse mortgage can influence your estate planning.

How does a reverse mortgage affect my estate planning?

A reverse mortgage can significantly impact your estate planning, as it involves using the equity in your home. Here are some key things to consider:

• Inheritance: If you plan on leaving your home as an inheritance for your children or other beneficiaries, a reverse mortgage may reduce the amount of equity they will inherit.
• Estate taxes: The proceeds from a reverse mortgage are considered income and may be subject to estate taxes. This could lower the value of your overall estate.
• Repayment after death: When the homeowner passes away, their heirs or estate must repay the outstanding balance on the reverse mortgage — this usually involves selling the home, but might require using other assets to cover the debt.

Before deciding on a reverse mortgage, you should discuss these potential implications with your family and financial advisor. An estate planning attorney can offer advice on minimizing any adverse impacts of a reverse mortgage on your estate.

Need to get tips on if a reverse mortgage is right for you? Get in touch with us at Lotly — we can help you find the right loan option customized for your financial health.

Reverse mortgage fees and interest rates

Like traditional mortgages, an equity release comes with fees and interest rates. You'll want to understand these costs before applying, so here are some standard fees associated with a reverse mortgage:

• Origination fee: This is the fee the lender charges for processing your loan application.
• Appraisal fee: Lenders typically require an appraisal to determine the value of your home before approving a reverse mortgage.
• Servicing fee: Lenders may charge a monthly servicing fee to cover the costs of managing and maintaining your loan.
• Closing costs: The fees associated with finalizing the reverse mortgage, such as title searches, attorney fees, and home inspections.

Also, interest rates on reverse mortgages can vary greatly depending on the type of loan you choose. Some loans may have fixed interest rates, while others have adjustable rates that can change over time. Carefully weigh the terms and conditions of your reverse mortgage before signing anything.

Pros and cons of reverse mortgages

Pros:

• Supplement your income: If you're struggling to make ends meet or need extra cash for living expenses, a reverse mortgage can provide a steady income stream.
• No monthly payments: Unlike traditional mortgages, you don't have to make monthly payments on a reverse mortgage. This can alleviate financial strain for retirees on fixed incomes.
• Stay in your home: A reverse mortgage allows you to stay in your home and retain ownership as long as you continue to meet the loan obligations.

Cons:

• Fees and interest rates: As mentioned earlier, like any other secured loans there will be various fees and interest rates associated with reverse mortgages.
• Potential impact on inheritance: Depending on the terms of your loan, taking out a reverse mortgage can reduce the inheritance you leave behind for your loved ones.
• Decrease in home equity: As you receive payments or take out a lump sum from a reverse mortgage, your home equity decreases. This means that if you decide to sell your home in the future, there may be less profit than expected.

How reverse mortgages affect heirs and estate planning

Depending on the terms of your loan, your children or beneficiaries may be responsible for paying off the remaining balance after your passing.

• This could reduce their inheritance or require them to sell the home to cover the debt.
• Consider this potential impact on your estate planning and discuss it with your loved ones before making a decision about a reverse mortgage.
• You may also want to consult with a financial advisor or estate planner for guidance.

On the other hand, if you have no heirs or do not plan on leaving an inheritance, a reverse mortgage may be a viable option for supplementing your income in retirement.

Alternatives to reverse mortgages

If a reverse mortgage does not seem like the right fit for your financial situation, here are some other alternatives to think about.

• Home equity loan or line of credit: These options allow you to borrow against the equity in your home, but you must make monthly payments and repay the loan in full over time.
• Downsizing: Selling your current home and purchasing a smaller, less expensive one can free up cash for retirement expenses without taking on debt.
• Retirement savings and investments: Careful planning and budgeting can help you get the most out of your retirement funds without relying on a reverse mortgage.

You'll want to research these options thoroughly before making any financial decisions.

Tap into your home equity with Lotly today

Let's recap what we've learned:

• Reverse mortgages let homeowners aged 55+ access their home equity without monthly payments. The loan is repaid when the homeowner moves out, sells the property, or passes away, but it reduces the home's equity and may impact inheritance.
• The loan structure offers flexibility, but comes with fees and growing interest. Borrowers can receive funds as a lump sum, installments, or a combination, while fees like origination and appraisal add costs, and interest accrues over time.
• Careful planning is essential to align reverse mortgages with financial goals. Alternatives like downsizing or a home equity line of credit may better suit some homeowners, while estate planning is crucial to mitigate impacts on heirs.

If you're a homeowner interested in an equity release, you're in the right place. Lotly works with a network of over 50 lenders across Canada, and we'll help you find the best options and rates personalized to your financial situation. Book a free consultation today to see these loans are right for you.

Frequently Asked Questions

What is the difference between a reverse mortgage and a home equity loan?

A reverse mortgage is a type of loan that allows homeowners aged 55+ to access their home equity without making monthly payments. The loan is repaid when the homeowner moves out, sells the property, or passes away. On the other hand, a home equity loan (also known as a second mortgage) is a lump sum loan that uses your home as collateral and must be repaid with interest over time.

Are reverse mortgages a good idea in Canada?

It ultimately depends on your individual financial situation and goals. Reverse mortgages can be a meaningful source of income for homeowners who have built up home equity, but it’s wise to think about all the fees and interest involved carefully. We also recommend you consult with a mortgage specialist and seek independent legal advice before making any decisions.

Is a reverse mortgage the same as an equity release?

Yes, financial institutions in Canada often use the terms "reverse mortgage" and "equity release" interchangeably. They both refer to a type of loan that allows homeowners to access their home equity without making monthly payments.

Can I lose my home with a reverse mortgage?

As long as you meet the loan requirements (such as living in your home as your primary residence and keeping up with property taxes and insurance), you will not lose your home. The reverse mortgage is only repaid when you move out, sell the property, or pass away. Since you're not making regular payments, you're less likely to lose your home than with a standard mortgage.