Older homeowners may find themselves in the frustrating situation of being cash poor despite having built up a lot of equity in their home. But there is a solution.
For eligible older Canadians, a unique financial tool called a reverse mortgage allows them to draw on the equity of their home to access funds needed in retirement. A reverse mortgage gives homeowners who are at least 55 years old a way to access the equity in their homes without having to sell or move.
Who offers reverse mortgages in B.C.?
There are two main reverse mortgage providers in B.C.: HomeEquity Bank and Equitable Bank.
HomeEquity Bank has been offering Canadians reverse mortgages for more than 35 years. Its product is available in all provinces in Canada, but not in any of the territories. EQ Bank only offers reverse mortgages in British Columbia, Alberta, Ontario and Quebec.
Types of reverse mortgages
Reverse mortgages are all similar, but there are a few different options that you can choose:
- Interest rate. You can opt for a variable or fixed interest rate.
- Open or closed. HomeEquity Bank has an open reverse mortgage loan with no prepayment penalties. With closed reverse mortgages, your prepayment options are limited and could come with fees.
- Receiving funds. Depending on the reverse mortgage product, you can choose to receive the funds all at once, or get a lump sum with the remainder disbursed in instalments at a later date.
What is the CHIP Reverse Mortgage?
The CHIP Reverse Mortgage is HomeEquity Bank’s reverse mortgage product. When the product was founded in 1986, it was formally called the Canadian Home Income Plan. These days, the reverse mortgage is simply referred to as CHIP.
HomeEquity Bank offers three different CHIP reverse mortgages:
- CHIP Reverse Mortgage. A traditional reverse mortgage.
- CHIP Max. You can get a higher initial, tax-free lump sum payment.
- CHIP Open. A short term loan that you can repay at any time with no penalties.
How does a reverse mortgage work in B.C.?
Getting a reverse mortgage is a straightforward process. That said, there are specific eligibility, interest rates and payments to consider.
Reverse mortgage eligibility
Although each lender may have slightly different guidelines, in most cases, you’ll need to meet the following eligibility requirements:
- You must own your home.
- You live in the home that you’re looking to borrow against.
- All individuals listed as owners must be at least 55 years old.
- Your home is in good condition.
- Your home has a minimum appraised value of $250,000
To start your reverse mortgage application process, you would fill out a form on the lender’s website. This questionnaire is a quick way of seeing if you’ll qualify and how much you may be able to borrow.
Once the online application is done, the lender will likely call you for additional details. If you decide to continue with the application, a home appraisal, title search and other legal matters will need to be addressed.
You can also call Home EquityBank and Equitable Bank directly if you want to start the application process.
Interest rates and fees
When considering a reverse mortgage, you’ll need to look at the interest rate first. This is significant because interest rates on a reverse mortgage are much higher than a traditional mortgage’s rates. And unlike a traditional mortgage where you can negotiate terms once your contract expires, your reverse mortgage rates will stay in place as long as your loan is active.
As of September 7, 2023, the rates available on the HomeEquity Bank CHIP Reverse Mortgage ranged from a fixed rate of 8.24% (8.59% APR) to a variable rate of 9.90% (10.32% APR). Both rates are for five-year terms.
As of September 7, 2023, Equitable Bank’s reverse mortgage rates ranged from 7.99% (7.99% APR) on a five-year fixed-rate loan to prime (7.20%) + 2.69% (9.995% APR) on a five-year adjustable rate loan.
As for startup fees, Equitable Bank charges $995, and you also need to pay for a home appraisal, legal fees and closing costs. HomeEquity Bank charges $1,795 for closing and administrative costs.
Both HomeEquity Bank and Equitable Bank charge prepayment penalties depending on when you repay your loan. The exception is HomeEquity Banks’ CHIP Open Mortgage which does not charge prepayment fees.
How reverse mortgage funds are dispersed
If you’re approved for a reverse mortgage, you can choose to take your money as a lump sum. This is beneficial for homeowners who have a major expense coming up, such as home renovations, medical bill sor they want to consolidate debt.
The other payment option is to take a lump sum at the start and then take additional payments over time. Going this route helps people manage their income as they won’t receive all their money at once. This may encourage them to budget for the long term.
Paying back a reverse mortgage
What’s appealing about a reverse mortgage is that you have no monthly payments like a traditional mortgage. Instead, you would repay the amount owing in the following situations:
- You’ve sold your home.
- You’ve decided to move out.
- All the borrowers have passed away.
- You default on your loan.
Some people don’t understand the default on your loan scenario since reverse mortgages don’t have any formal monthly payments. In the case of a reverse mortgage, a loan default refers to the following situations:
- The funds from the reverse mortgage are used for illegal activity.
- You’ve lied on your reverse mortgage application.
- You don’t maintain your home in good condition and thus lower its value.
- You break conditions in your reverse mortgage contract.
Are reverse mortgages a good idea in B.C.?
A reverse mortgage in B.C. can be a good idea for some homeowners. Generally, if you are house rich, but have limited savings, a reverse mortgage is a good product to consider since it’ll free up funds.
That said, until you pay off your reverse mortgage, you’ll incur interest charges, which can greatly eat away at the equity you have in your home. Be sure to consider all scenarios before accepting a reverse mortgage.
Reverse mortgages are best for those who…
|Reverse mortgages are wrong for those who...|
Questions to ask before applying for a reverse mortgage
Some questions you should ask before getting a reverse mortgage include:
- How much will a reverse mortgage cost me in total?
- Is it worth sacrificing long-term equity for an immediate loan?
- Will the funds advanced be enough to live on?
- How is the money dispersed?
- Does my estate have to repay the loan when I pass away?
- Are there any other financing options available?
Alternative to a reverse mortgage
Admittedly, a reverse mortgage isn’t for everyone. They can be expensive and only give you access to limited equity. Fortunately, there are other options available, such as:
- Apply for a line of credit or low- interest credit card.
- Sell your home and downsize.
- Rent out a room to a tenant.
- Sell some of your investments.
Pros and Cons of reverse mortgages
Whenever you’re making a financial decision, you need to look at the pros and cons so you can make an informed choice.
Pros of a reverse mortgage
- Lets you access equity in your home.
- No regular payments.
- Does not affect government benefits, such as Old-Age Security (OAS) or Guaranteed Income Supplement (GIS).
- There’s no tax on the money you get.
Cons of a reverse mortgage
- Interest rates are high.
- The longer you have the loan, the less equity you’ll retain.
- Initial costs can be expensive.
- Potentially less money in your estate for your beneficiaries.
Frequently asked questions about getting a reverse mortgage in B.C.
Equitable Bank and HomeEquity Bank offer reverse mortgages in B.C.
HomeEquitable Bank allows you to borrow up to 55% of the appraised value of your home, whereas Equitable Bank has a 59% limit.
With interest rates still high, renewing your mortgage in 2023 probably won’t be the best part of your year. If you’re worried about the impending cost of your home loan, keep these options in mind.