Are you Eligible for a Reverse Mortgage through a Private Lender?
What is a reverse mortgage? Basically, this involves a lender making a lump sum payment to you and having no mortgage payments for the term until the mortgage is paid. This is a great way for you to access the equity in your home when your financial picture has had a reversal – or if you have some sudden changes to your financial picture that makes your cash flow turn in the wrong direction.
Who is eligible for a reverse mortgage?
Any property owner is eligible. With private lenders, there are no age restrictions. You can use your primary residence, rental property or raw land as security.
You can get a reverse mortgage on your property, even if you have an existing mortgage. The proceeds from the reverse mortgage would first go to settle your existing 1st mortgage, and after that you can use other proceeds to settle any other liens or debts on the property.
How do you qualify for a reverse mortgage?
Your lender will consider the property’s location, condition, type, appraised value and your exit strategy. For example, do you plan on refinancing or selling within two to three years?
You will also need Independent Legal Advice before you finalize the reverse mortgage.
How is a reverse mortgage different with a private lender?
In addition to the fact that you don’t have to be at least 55 to get a private reverse mortgage, you generally get the whole approved amount in a lump sum, although some exceptions may apply.
You’ll want to ask the private lender about the payment options and whether or not any other fees or restrictions on repayment apply.
You do have to settle any existing loans, lines of credit, liens, writs, judgments or any other debts tied to your house from the proceeds of your reverse mortgage before you use the money for anything else. After that, you can use the proceeds as you see fit. Typical choices include:
- payments for home improvements or repairs
- sending your children off to college
- paying for health care expenses
- helping with other bills
- repayment of other debts
It is important to note that, if you have a reverse mortgage, it is unlikely that you will be able to take out any other loans secured by the same property, including a home equity line of credit or a secondary private mortgage loan.
How do you repay a reverse mortgage?
No regular payments are required on a reverse mortgage. However, you can repay the full amount at any time. You will want to review the terms of your loan with the underwriter, as there is often a prepayment charge if you pay the loan off before a predetermined time has elapsed. Afterward, though, there is no prepayment charge.
You do face interest charges until you pay the loan in full. This interest gets added to the original loan balance, which makes the total amount owed increase over time.
Upon sale or refinance, the total amount due is paid. Also, if you default in some way, you would owe the entire amount. Even though no regular payments are required, it is possible to default on a reverse mortgage if you:
- use reverse mortgage funds for anything illegal
- give dishonest answers in your reverse mortgage application
- allow your property to lose value by failing to maintain and repair it
- fail to abide by the conditions in your reverse mortgage contract
Different lenders have different conditions that can lead to default, so you will want to ask about this before signing your paperwork.
If you pass away before you have paid off the reverse mortgage, the estate is liable for the entire amount due. If you own your house jointly with a spouse, then the loan comes due when the last one of you passes or away or sells the home. If you qualify and purchase mortgage life insurance at closing, that mortgage insurance company would pay off the mortgage.
How much does a reverse mortgage cost?
Exact costs will vary by lender, but you can expect to pay:
- a higher interest rate than you would for a traditional or semi-traditional mortgage
- an appraisal fee for the property
- setup fees for the brokerage and the lender
- a prepayment penalty if you settle the whole loan before the predetermined time
- legal fees for closing costs or independent legal advice
Different lenders sometimes use different terminology to talk about the same fees. Some fees may roll into your loan balance, while others may be due at closing. Because of these differences (in addition to differences in interest rate) make sure you shop around and get the best deal for your situation.
You will also want to compare the cost of a reverse mortgage with other ways to manage your real estate situation so that you can adjust to your new financial situation. Other options include:
- Taking out another type of loan, such as a line of credit, personal loan or credit card
- Selling the home
- Downsizing into a smaller home
- Renting an apartment or a different home
- Moving into assisted living or another form of alternative housing
Depending on your situation, you might want to visit with your family and with a financial advisor before you take out a reverse mortgage, so that you understand how the loan works and how it could influence your home equity over time.
Where can you get a reverse mortgage in Canada?
There are two financial institutions that offer Canadians reverse mortgages:
- Equitable Bank has the PATH Home Plan, which you can secure through mortgage brokers in Ontario, British Columbia and Alberta.
- HomeEquity Bank has the Canadian Home Income Plan (CHIP), which you can enter from anywhere in Canada, either directly through the bank or through a mortgage broker.
Your own bank might offer a financial product that suits your situation
There are some private lenders who also offer reverse mortgages with an easier qualification process. However, the terms of these private loans generally max out after two years. Private lenders who issue reverse mortgages are aimed at:
- property owners who do not qualify for enough money from the two institutions listed above
- property owners who do not meet those institutions’ age requirements
- property owners who want to sell in the next 2-3 years but cannot currently afford their mortgage payments
- property owners wanting to take out a mortgage on a non-primary residence
What are the pros and cons of a reverse mortgage?
- No monthly payments are required
- No tax owed on the money you borrow
- You still own the property
- No impact on Old-Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits, if applicable
- You can turn some home equity into cash while retaining ownership
- You might have options about how you receive the funds, depending on the lender
- Higher interest rates than most other mortgage types
- Home equity can decrease as the interest builds up over time
- Your estate will be required to repay the total amount due on the loan within a set period of time after you pass away
- It may take longer to settle your estate, upon decease, than the time that you have to repay a reverse mortgage
- This could reduce the amount of money you have to leave to your beneficiaries
- Overall costs could exceed what you would face with a traditional mortgage or other lending products
What should you ask your lender about reverse mortgages?
- How much are the fees? When are they payable?
- How can you access the money from a reverse mortgage?
- What interest rate will you pay?
- What are the penalties if you sell your house within a certain time frame?
- How much time will you or the estate have to pay the balance if you move or pass away?
- What happens if the estate cannot settle the balance within the required time period?
- What happens if the loan is more than the value of the home at time of repayment?