Reverse Mortgage FAQs: A Primer on Who, What, Why

Here at Equitable Bank, we’ve seen an increasing industry trend in reverse mortgages which is why earlier this year, we launched our PATH Home Plan. Sold through licensed mortgage brokers, the PATH Home Plan is available to qualified homeowners who are 55 years of age or older and live in major urban centres within British Columbia, Alberta, or Ontario.

Although a home equity line of credit (HELOC) offers lower interest rates compared to a reverse mortgage, it may be harder for retirees to obtain a HELOC, which is why a reverse mortgage may be appealing to some of your clients.

If you’re not familiar with reverse mortgages, it’s a loan that allows homeowners (typically retirees) to turn some of their equity into cash without having to sell their home. It’s great for people who have a valuable home but limited retirement income. These types of loans have become increasingly popular since borrowers are not required to make any payments until the loan is due, which is typically when they move, sell their home or when the borrower passes.

Benefits of a Reverse Mortgage

• Homeowners can access some equity without having to downsize or sell their home
• The money you borrow is tax free and doesn’t affect government programs such as Old Age Security or Guaranteed Income Supplement benefits
• Homeowners have options as to when and how they receive the money
• The equity unlocked can be used to finance a variety of things
• No payments are required until the reverse mortgage is due
• You still own your home

Although reverse mortgages have quite a few benefits, it’s important to note that rising interest rates could have a negative impact on the equity you hold in your home as the loan interest adds up faster over the years.

 Scenarios where a reverse mortgage might make sense

Consider Jack (72) and Jill (70), a retired couple in Toronto whose mortgage free primary residence is valued at $1 million. They’re looking to obtain a reverse mortgage to help maintain their lifestyle in retirement.

The maximum loan to value ratio is calculated using the age of the youngest applicant (Jill) and allows the couple to take out a reverse mortgage of $250,000 which could then be used for things such as:

• Maintaining or enhancing their lifestyle
• Helping their children or grandchildren with a down payment on their first homes
• Paying down other debts
• Making home renovations
• Travel

Retirees have a variety of goals. Equitable Bank is here to help your clients focus on the lifestyle they want by giving them access to the equity they’ve built in their homes.

Eligibility for PATH Home Plan

To be eligible for a reverse mortgage in Canada your client must be at least 55 years old and the home used to secure the loan must be their primary residence.

Equitable also uses a maximum loan to value ratio, which considers the age of the person applying, where they live, and the home’s condition, type and appraised value. Typically, the older your clients are and the higher the home equity they have, the larger the loan they may be able to get.

*The location of your property is considered when it comes to the maximum amount you may be able to borrow.

Industry Trends

Once thought of as a loan of last resort for seniors, inquiries about reverse mortgages have doubled over the last few years since they can increase the income for retirees. Many baby boomers have seen substantial increases in the value of their homes due to rising real estate prices in Canada, but at the same time, many boomers have struggled to save for retirement.

Only 1 in 5 middle income Canadians retiring without a pension have saved enough for retirement. Meanwhile, seniors aged 60 and older account for the fastest growing segment of the population in Canada, and more than 11 million people are 55 and older. Those in this demographic are most likely to be homeowners and many have been buoyed by high home prices and now own their homes free and clear.

Through the help of its valuable broker channel, Equitable Bank’s PATH Home Plan will allow homeowners age 55 and above unlock their home equity and enjoy a more comfortable retirement.