Reverse Mortgage Loan Blog

Here are some questions you need to ask first 

As explained last week, a reverse mortgage is a way for cash-poor seniors age 60 and over to turn the equity in their house into spending money. The equity value is the current market value less any mortgage debt still owing.

Great, you say. Where do I sign?

Hold your horses. If you don’t ask the right questions, you can get into something painfully different from what you were expecting.

Remember, this is a loan that will eventually have to be paid back, with interest, by somebody - you, if you move or sell, or your heirs when you die. That’s fine if your ambition is to die on the day you spend your last dollar, but not if you would like to leave something to the next generation or two.

Because you don’t have to make interest payments along the way, the loan can get so large that the equity in your house is wiped out. Providers offer some comfort with what’s called a negative equity guarantee. This means they will never seek repayment of more than the fair market value of the house at the time the deal ends. Make sure you get that guarantee.

There are two key numbers to get straight in your decision whether to go for a reverse mortgage.

The first is how much of the current equity value you will be borrowing against. Providers typically will lend only up to about 40 per cent and that only to older borrowers. Younger seniors in their 60s will get less because there will typically be a longer period before repayment.

Second is the interest rate you will be charged. The higher the rate, the more likely it is that unpaid interest will boost the loan toward the fair market value of the house later on. You can reduce the odds of that happening by choosing to make interest payments and even capital repayments while you or your spouse are still living in the house.

Providers link their interest rates to the Canadian banks’ prime rate, roughly the rate at which the banks lend to their best customers - currently 6.25 per cent. Providers offer variable-rate loans at a set premium over the prime. When the prime rate changes, so does the interest charged on your reverse mortgage.

Canadian Home Income Plan, or CHIP, for long periods the only provider in Canada, currently charges 2 percentage points over prime, 8.25 per cent. Seniors Money Canada, a newcomer, charges 1.25 points over prime, 7.5 per cent. CHIP also offers higher fixed-term rates ranging from six months up to five years. Seniors Money doesn’t. However, Seniors Money charges no penalties for early repayment. CHIP charges penalties on repayments in the first two years.

Seniors Money currently offers reverse mortgages only to homeowners in Ontario. It says it will expand into other provinces, including Quebec, next year.

With a new competitor seeking to carve out a market share, you can expect to see the two providers ring the changes on their combination of application fees, penalty policies and interest rates. CHIP itself has made changes over the years to make the deal more flexible to borrowers.

For up-to-the-minute information, you can go the following sources: CHIP at www.chip.ca or 866-522-2447; Seniors Money at www.seniorsmoney.ca or 877-773-6550.

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