How Reverse Mortgages Work
A reverse mortgage is a particular type of mortgage loan that is only available to Canadians who are at least 55 years of age. It’s called a reverse mortgage because – unlike other versions – it doesn’t involve monthly payments.
Its key features are:
- You have to be 55+ years of age to qualify.
- There are no monthly payments.
- You can borrow as much as 55% of the total value of your home.
- The interest charged is already added to the amount you owe.
As you might have noticed, there is a restriction on age primarily because reverse mortgages were designed specifically for seniors or for people nearing retirement.
Note: this information only applies to reverse mortgages in Canada. In the United States, they are available to people 62 years of age or older. Distinctions like this are why our guide is so important. A lot of people considering reverse mortgages get confused because of the different rules in different countries.
Take a look at our FAQ section down below to learn more.
The Canadian government website also has a definition available or you can download our guide.
How Does the CHIP Reverse Mortgage Work in Canada?
In Canada, reverse mortgages are commonly referred to as “CHIP reverse mortgages.” For more information on that, go through our FAQ section down below.
The maximum amount you can take out in a reverse mortgage is 55% of the total value of your home. However, that doesn’t mean everyone is eligible for that percentage, because there’s actually a tiered system.
So, for example, someone who is 55 wouldn’t actually qualify for a loan worth 55% of their home’s total value. The percentage they could borrow would be a lot less.
You have to be much older than 55 to be considered for the 55% loan. The reason for this rule is to ensure people don’t completely destroy their home equity.
One of the most important goals of a reverse mortgage: to ensure people don’t lose their homes.
The lender only recovers their payment when the owner (or owners) passes away. At that point, the lender recoups the amount that was borrowed and the interest that had accrued. This comes out of the borrower’s estate.
The total can be paid back either one of two ways. If an heir inherits the home, they can remortgage it. Otherwise, the lender will collect their payment after the home is sold.
Hopefully, this helps prove why a reverse mortgage isn’t “too good to be true.” No one is walking away with anything without paying for it.
The lender is simply putting off their profits until after the homeowner has passed away. This ensures the homeowner enjoys a comfortable retirement. However, in the end, the lender still makes money on the transaction.