If you’re 55 or older and own a home in Ontario, you may have built substantial equity in your property while finding that your retirement income does not provide the same flexibility as your working income.

A reverse mortgage is one way to access some of that home equity without selling your home or making regular mortgage payments. However, that convenience comes with important costs and long-term considerations.

A reverse mortgage is not automatically a good or bad choice. The more useful question is: Does it fit your financial needs, your home, and your longer-term plans?

Here are seven questions worth asking before deciding.

1. Why Do I Want to Access My Home Equity?

Start with the purpose of the money.

Homeowners may consider accessing equity for reasons such as:

• supplementing retirement cash flow
• paying for home repairs or renovations
• managing regular expenses
• repaying existing debts
• covering healthcare or other significant expenses

A reverse mortgage allows eligible homeowners to convert part of their home equity into borrowed funds while continuing to own the home.

But the purpose matters. If you need a relatively small amount for a short period, for example, the most appropriate solution may be different from someone who wants ongoing access to additional retirement cash flow.

Before choosing the product, identify the problem you are trying to solve.

2. How Much Can I Actually Borrow?

A reverse mortgage does not allow you to borrow your home’s entire value.

According to the Financial Consumer Agency of Canada (FCAC), homeowners may usually borrow up to 55% of the current value of their home. The actual amount available can depend on factors including:

• your age
• the age of other individuals registered on title
• the home’s type and condition
• the appraised property value
• the lender’s requirements

The property generally must also be your principal residence.

The maximum percentage should therefore not be treated as the amount every homeowner will qualify to receive. Your individual circumstances and the lender’s criteria determine the actual amount available.

3. What Will the Reverse Mortgage Really Cost?

One of the most important features to understand is that you generally do not make regular mortgage payments.

Instead, interest is added to the reverse mortgage balance.

That means the amount owing can increase over time.

Reverse mortgage interest rates are also typically higher than rates on conventional mortgages or home equity lines of credit (HELOCs).

Depending on the lender and product, other expenses may include:

• appraisal fees
• legal fees
• set-up or closing costs
• prepayment charges
• other applicable lender costs

This is why comparing only the amount of cash you can receive can be misleading.

Ask to see how the mortgage balance could change over time and understand the total borrowing cost.

4. How Will I Receive the Money?

Not every reverse mortgage advances funds in exactly the same way.

Depending on the product, funds may potentially be available through:

• a lump sum
• an initial lump sum followed by additional advances
• regular scheduled payments

How you receive the money can affect your borrowing cost.

For example, taking the entire available amount immediately generally means interest begins accumulating on that entire amount. If you don’t actually need all of those funds right away, another advance structure may be worth comparing.

Ask yourself:

How much money do I need now, and how much might I need later?

The answer can be just as important as the total amount available.

5. What Happens to My Home Equity Over Time?

You continue to own your home with a reverse mortgage.

However, because interest is added to the mortgage balance, the amount owing may grow over time. As a result, the equity remaining in the property may decrease.

This deserves particular attention if:

• leaving the home or its equity to your children is important to you
• you expect to sell and move in the foreseeable future
• you may need your home equity for future care or housing
• estate planning is an important priority

This doesn’t necessarily mean a reverse mortgage should be avoided. It means the decision should include both your current cash-flow needs and your future plans.

Family members, financial advisors and estate-planning professionals may also have a role in that discussion.

6. When Does the Reverse Mortgage Have to Be Repaid?

Although regular mortgage payments generally aren’t required, the debt eventually has to be repaid.

According to FCAC, repayment is generally required when certain events occur, such as when:

• you sell the home
• you move out of the home
• the last borrower dies
• you default under the mortgage agreement

Individual lenders establish their own repayment requirements and timelines.

You should therefore understand what would happen if your circumstances change unexpectedly.

Also ask about prepayment provisions. If you decide to repay the reverse mortgage earlier than anticipated, a prepayment charge may apply depending on the mortgage terms.

7. Have I Compared the Alternatives?

This may be the most important question of all.

A reverse mortgage is only one method of accessing home equity or improving retirement cash flow.

Depending on your circumstances and qualification, alternatives could include:

• refinancing your existing mortgage
• obtaining a HELOC
• another type of mortgage or loan
• selling and downsizing
• using other savings or investments
• restructuring existing debts or expenses

These options work very differently.

For example, a HELOC may have a lower interest rate than a reverse mortgage, but qualification and payment requirements are different. Downsizing eliminates the need to borrow against the existing property but requires selling and moving.

The right comparison therefore isn’t simply:

“What is the reverse mortgage rate?”

A better question is:

“Which option best addresses my needs when I compare qualification, monthly cash flow, flexibility, total cost and my long-term plans?”

An Important Ontario Requirement: Independent Legal Advice

There is another important protection for Ontario borrowers.

FSRA states that a mortgage brokerage cannot arrange or enter into a reverse mortgage with a borrower unless the borrower provides a written statement signed by a lawyer confirming that the lawyer has provided independent legal advice about the proposed reverse mortgage.

This is in addition to the mortgage professional’s obligations regarding suitability and disclosure of material risks.

Independent legal advice gives you an opportunity to understand the legal obligations before completing the transaction.

The Bottom Line

A reverse mortgage can provide eligible homeowners with a way to access home equity without selling their property and without making regular mortgage payments.

But those benefits should be considered alongside the other side of the equation:

interest accumulates, the mortgage balance increases, and the equity remaining in the home may decline over time.

Before deciding, consider these seven questions:

1. Why do I need the money?
2. How much can I actually borrow?
3. What will it really cost?
4. How and when will I receive the funds?
5. What happens to my home equity?
6. When must the mortgage be repaid?
7. What other options should I compare?

For some Ontario homeowners, a reverse mortgage may fit their retirement and cash-flow plans. For others, a HELOC, refinance, downsizing strategy or another solution may be more appropriate.

The objective isn’t simply to access the most equity possible. It is to understand which option fits your complete financial situation and longer-term plans.

Want to Compare Your Options?

If you’re an Ontario homeowner considering a reverse mortgage, I can help you review the mortgage options available and compare factors such as qualification, cash flow, borrowing costs and your longer-term objectives.

Chi-Ying Lui (Tammy)
Mortgage Agent Level 2
Dominion Lending Centres Rolima Financial Group
FSRA Brokerage Licence #13216
416-884-8689
tammy@rolimateam.ca
Apply Now

General Disclaimer:
Mortgage options, rates, terms and qualification requirements vary by lender and borrower circumstances and may change without notice. Subject to lender approval and applicable terms and conditions. This article is provided for general educational purposes and is not intended as financial, legal, tax or estate-planning advice.