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Most people have heard of a reverse mortgage, but many don’t know how it works. A reverse mortgage enables you to receive money from the equity in your home without having to sell. The financing allows you to borrow up to 55% of your property's current value.

Determining the amount borrowed

The maximum amount borrowed is determined by:

• Your age
• Your home’s appraised value, as determined by a third-party appraiser
• The type and location of your home

Eligible borrowers

A borrower can apply for a reverse mortgage if:

• He or she is at least 55 years of age
• He or she owns their home

How a lender makes a decision

A lender will consider the following criteria when reviewing your reverse mortgage application:

• The ages of all the people listed as owners of the property
• The location of the property
• The home's condition
• The appraised value
• Type of residence
• A lender’s assessment of an applicant’s financial ability to keep up with their property tax, insurance and home maintenance obligations

Existing mortgage or other secured debts

You must pay out any existing mortgages or lines of credit secured against your home – like a HELOC – if you are to take out a reverse mortgage. The proceeds from the reverse mortgage can be used to close out these items at the time of the reverse mortgage funding.

Ways you can use the funds

With the remainder of the funds, you can:

• Pay for home improvements and repairs
• Keep up with regular monthly expenses
• Repay other debts
• Travel
• Help your loved ones
• Whatever you wish! It’s your money.

Receiving reverse loan proceeds

You can receive the money for a reverse mortgage in one of 2 ways:

• You can get the money in one lump-sum.
• You can receive some of the proceeds upfront and come back for more money as you need it in the future.

Repaying a reverse mortgage

Unlike a traditional mortgage, you do not need to make regular monthly payments on a reverse mortgage.

When you need to repay the loan

You need to repay the amount if:

• You choose to sell your house
• You move out of your home
• The last borrower on title to the home passes away
• You default on the mortgage by not keeping up with your property obligations

When a default applies

A default on a reverse mortgage applies if:

• The applicant provides false details on their mortgage application
• The home falls into disrepair, which reduces its appraised value
• The borrower fails to pay their property taxes or home insurance
• The borrower does not follow the conditions set out in the reverse mortgage agreement

Repayment after the last borrower passes away

When the last borrower passes away, their estate must repay the total amount owed on the reverse mortgage, typically after 180 days. This gives the borrower’s family or trustees enough time to determine how they want to repay the loan – either by selling the home and paying back out of proceeds, refinancing with another mortgage, or paying it off with other assets.

The costs of reverse mortgage financing

The expenses related to reverse mortgage financing may include:

• Interest
• A setup fee
• A house appraisal fee
• Legal fees for independent legal advice
• A prepayment penalty if the loan is paid off early

Check out the costs, as they can vary by lender. Some fees may be included in the balance of the loan amount while other expenses may be paid upfront.

Where to get a reverse mortgage in Canada

Several financial institutions offer reverse mortgages in Canada, including Bloom Finance Company. To get answers to any questions you may have about reverse mortgage and whether it is a good fit for your situation, please call us at 1-866-882-5666 or complete a short online application.

Advantages and considerations of a reverse mortgage

When taking out a reverse mortgage, you should consider the advantages and considerations.

Advantages

• You are not obligated to make monthly loan payments
• You can turn some of the equity in your home into cash without the need to sell
• No tax is paid on the borrowed financing
• The money does not affect Canada Pension Plan (CPP), Guaranteed Income Supplement (GIS) benefits or Old-Age Security (OAS) money a borrower may be receiving
• You can stay in your home as long as you wish

Drawbacks

• The interest rate may be slightly higher than on a traditional prime mortgage because of the benefit of no payment requirements
• The loan balance will grow over time

What to ask the reverse mortgage lender

You should ask the following questions of your reverse mortgage lender:

• How will I receive the loan proceeds?
• Are there upfront fees?
• What is the interest rate?
• What may cause a default on the financing?
• Will I need to pay any penalties if I sell my home within a certain timeframe?
• How much time do I have to pay off the loan if I choose to move?
• How much time does the estate have to pay off the loan amount when the last borrower passes away?

Conclusion

A reverse mortgage is a powerful solution to provide 55+ Canadians with financial flexibility in retirement. Make sure you fully understand the product before you take out a reverse mortgage, and ask all the questions you need of your reverse mortgage lender.

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