Reverse Mortgage Ontario

In this article, we take an honest look at the compelling reasons why, in 2023, the reverse mortgage Ontario will make sense for many and why it won’t make sense for others.

As a Certified Financial Planner (CFP) and Mortgage Broker of over 15 years, I am uniquely positioned to advise on areas of retirement and mortgages to help you arrive at the best possible decision for you and your family.

Understanding Reverse Mortgages in Ontario

Here, we will review the information most relevant to reverse mortgages in Ontario. But for the most accurate and reliable review of the reverse mortgage based on your situation, connect with Altrua Financial.

  • How does the reverse mortgage work?
  • The Top 5 Benefits of a Reverse Mortgage:
    • Home Equity growth
    • Opportunities for additional investment growth 
    • Reducing interest payments 
    • Income Tax Savings
    • Capture more OAS and CPP pension income
  • Questions to ask yourself to determine if a reverse mortgage is right for you.
  • Situations where a reverse mortgage doesn’t usually make sense
  • How to select the best reverse mortgage lender with the best features and rate
  • Reverse mortgage vs home equity line of credit (HELOC)

How Does the Reverse Mortgage Work?

There’s a lot of information on reverse mortgages, but it’s a relatively straightforward product. It’s fundamentally a mortgage loan, like any other, but with a few key differences. 

  • The amount loaned depends on age: Typically 30% – 50% of the home’s value can be mortgaged.

Reverse Mortgage Similarities

  • It is a loan that is registered to the home.
  • There is a compounding rate of interest attached to the loan.
  • There is an application process, similar to applying for a standard mortgage.
  • There will be an appraisal done on the property to help determine the value
  • There is an appraisal fee, however, at Altrua Financial we can usually cover this cost.

Reverse Mortgage Differences

  • The loan amount owing increases over time as payments are made to the homeowner. For example, if the approval is for $250,000, it may take 10 years to reach the borrowing limit.
  • The borrower has the option of a stream of monthly payments, a one time lump sum payment – or a combination of both. For example, a one-time draw to repay a debt and then use the monthly payment stream to help support lifestyle. 
  • You dont have to make payments as long as you live in the home. The mortgage does not have a maturity date and there is no ‘re approval’ later on. It is paid off when you leave, or the house is sold. 
  • You need to be age 55 or older to apply.
  • The approval does not rely on income or credit. Mainly the equity in the home.

Top 5 Benefits of a Reverse Mortgage

The reverse mortgage has been available in Canada for over 35 years. Over much of this time, it has been seen as a last resort option, coming to the rescue when other sources of funds are depleted. 

However, housing values have generally skyrocketed over the past 20 years to become a disproportionately large asset class for many, and the nature of retirement and lifestyles has been changing too. 

Given this, the thinking about how to benefit from this vast and often unexpected home equity accumulation has been changing. The reverse mortgage is being recognized more as an innovative tool that helps to provide balance and security to a retirement plan.

There are 5 main ways a reverse mortgage can provide balance and security to a retirement plan

Home Equity Can Still Grow

The typical reverse mortgage is approximately 20% – 40% of the home’s value. The approval amount can certainly be less than this if desired. But for the approval to be more than 40% of the value of the home, this can happen in the later years of retirement when age is higher.

The point here is that the reverse mortgage is a smaller part of your home’s overall value, and given this, you can reasonably expect your home’s equity to grow faster than the cost of paying reverse mortgage interest. 

This can reasonably result in continued net positive home equity accumulation.

Let’s look at an example to help explain how this works.

First, let’s estimate that taken together, the value of the home grows at a minimum of 4% per year over the next 15 years.

If the house is worth $1,000,000 then at 4% growth is a minimum of $40,000 in equity gained annually.

On a compounding basis over 15 years, this totals $820,302 of growth (the property is worth $1,820,302).

Now let’s estimate the average interest rate on a reverse mortgage over the next 15 years is 6%.

On a $300,000 mortgage, a 6% annual interest rate is $18,000.

On a compounding basis over 15 years, this totals $436,228 of interest (the mortgage is now $736,228).

So in this example, as the house is appreciating at a lower growth rate of 4% and the reverse mortgage at 6%, you would gain at least $384,074.

Ofcourse over the span of 15 years, these figures will differ. But the point of the example is to highlight that, because the mortgage amount is smaller than the value of the home, in many cases, it is still realistic to build equity long term even as the property helps to fund retirement, and interest costs are accumulating.

It’s also important to note, the amount of mortgage funds needed ‘upfront’ on approval is often not the total approved amount. 

For example, if a $300,000 reverse mortgage is approved, but this money is drawn over 15 years (180 months), this would result in a $1667 monthly income stream to the homeowner. In this case, the $300,000 loan would be drawn gradually, and interest would only be charged on the amount drawn, similar to a Home Equity Credit Line. Once the amount borrowed hits $300,000 maximum, the income stream would stop and this is when the interest would accumulate on the total amount. 

In this case the total interest over 15 years at 6% would be $187,219.

Again, over these 15 years the example of the $1,000,000 property growth at 4% would be worth $820,302 more.

So given a gradual $1667 monthly withdrawal the equity position would still be up by $633,083.

Its important to note that this example using a $1,000,000 home is relative to any other home value. For example if the home value was $500,0000 and the reverse mortgage takeout was $150,000 then the results would be relatively the same, but 50% less.

In almost any reasonable case, the interest payments will be substantially mitigated by the growth of the home.

More investment growth opportunities

At the time of writing, financial markets, including stocks and bonds, are well off their highs. 

With this said, the market tends to rebound over time and there has not been a point in modern history where markets didn’t keep increasing long term. 

The real cause of investment losses is if investments are sold when they’re down. Selling during a loss is known as ‘crystallizing’ losses because the opportunity for the investment to rebound has been lost.

By supplementing income during market downturns with a reverse mortgage, crystallizing these losses can be reduced or avoided altogether.

Moreover, allowing investments to remain in the registered accounts for a longer period provides more opportunity for investments to compound and grow over time, perhaps on a tax free basis. 

This longer term investment horizon can add substantial security and stability to a retirement plan where Registered savings are a significant part of funding lifestyle preferences. This area deserves special attention where registered savings, along with pension income, are not ample to meet medium to long term retirement goals. The reverse mortgage can allow you to get more from what you have from existing investments. 

Reduce interest payments

If you are carrying a mortgage or other debt into retirement, these payments can cause stress and undermine your lifestyle. By using the equity in your home to consolidate these existing debts with a reverse mortgage, you do not need to repay this debt again as long as you remain in the home. 

Moreover, if the interest on current debts is at a higher rate, such as 7% – 20% interest, and if there is no reasonable repayment plan without selling the house, then the reverse mortgage can lead to substantial long term interest savings while allowing you to remain in the home. 

The average reverse mortgage interest rate over the past 15 years has been in the 5%-6% range, and at some points, even lower. So there may be an opportunity to lower overall interest costs, depending on the situation.

Again, unlike regular credit cards, loans or mortgages, the reverse mortgage will not mature. There is no ‘re approval’ and will not require repayment as long as you live in the home, even though the interest is being charged by the reverse mortgage provider.

Income Tax Savings

The one-time payment or regular stream of income from a reverse mortgage does not add to your income. The mortgage funds are received tax-free. 

If a reverse mortgage means less income is required from other taxable savings and pension sources (like RRSP/RRIF/CPP), this can help keep your income tax rates lower. 

For example, a tax planning goal could be a 5% reduction in income taxes over the golden years of retirement. This could easily add up to thousands of dollars over 10+ years. 

Capture more OAS and CPP pension income

When income increases in retirement, this can negatively affect your Old Age Security payments. This can happen in 2 ways. 

The first is called the OAS clawback. If your income is more $86,912 in 2023, you will lose out on some or all of the OAS in the next year.

The second is the availability of a Guaranteed Income Supplement or GIS. Generally speaking in 2023, if a couple’s income is lower than $49,920 then the Guarantee Income Supplement can be received. The maximum GIS benefit is $1,026.96 monthly. 

There are many unique situations in retirement, ofcourse, and the chart below summarizes these GIS situations. 

But in general, if taxable income can be kept lower, especially between ages 65 – 70, then the reverse mortgage could help allow for substantial additional monthly income. 

Along these lines, deferring CPP to age 70 can result in higher CPP benefit payments. Deferring CPP can also help result in lower tax rates during the earlier years of retirement. 

More specifically, a maximum CPP at age 65 is $15,678.84 and the maximum CPP at age 70 increases by 8.4% per year if it is delayed past 65, or 42% total higher monthly payments based on 2023 calculations.

For these 5 reasons, a reverse mortgage can be a good decision for many. Beyond acting as a last resort access to a revenue stream, there are real calculated benefits of including a reverse mortgage as part of a retirement plan. 

Given this, the type of retirement situation that a reverse mortgage can fit into is fairly broad, but here are some more specific questions to consider asking to help see if its right for your situation:

  • Do you wish to remain in the home for a minimum of 5 years while the equity helps to support your lifestyle during the prime years of retirement?
  • Are you are a snowbird that wants to use the home’s equity to help fund a few months a year down south, or another specific retirement goal?
  • Are there existing debts in the financial picture that require ongoing payments into retirement?
  • Are you looking to delay cashing out investments until the markets have properly rebounded?
  • Is there a legitimate calculated opportunity to increase your overall CPP and OAS benefits?
  • Is there a legitimate calculated opportunity to reduce your income tax?
  • Have you considered estate planning, and does your family understand the logic behind the decision to apply for a reverse mortgage? Do they understand that equity will likely continue to grow based on the value of the home, even as interest costs accumulate? 
  • Have you considered your alternatives? Is there perhaps a lower cost way to fund your retirement goals? Does downgrading your home or renting make more sense than a reverse mortgage to obtain funds?

When a reverse mortgage doesn’t make sense

There are four main reasons why a reverse mortgage might not make sense:

(1) If your retirement needs are comfortably being met by other sources of income, with little or no other debt in your financial picture, you’re comfortable with your lifestyle, and if you have ample liquidity to see you through investment downturns, the cost of a reverse mortgage may not be worth it. There may be pension optimization or tax strategies available, and these potential opportunities should be considered. However, typically those in a highly liquid financial position won’t see as much overall benefit given the reverse mortgage interest rate costs over time. 

(2) If a temporary bridging of funds is needed for a shorter period such as 1-2 years, the reverse mortgage may not be the best solution. For the reasons noted above, the reverse mortgage is designed to be a medium to longer-term retirement tool.

 (3) Next, if there is financial distress, such as difficulty paying regular minimum expenses like property tax, insurance or general upkeep of the home, and at the same time if there is substantial debt built up the reverse mortgage may not be the best answer. In cases where finances are distressed and the reverse mortgage allows the homeowner to get by, this tends to lead to less desirable medium – long term situations. In situations where affordability is very strained, it may be better to sell the home, take the equity and reduce ongoing expenses more significantly.

(4) Finally, if a spouse or other family does not yet understand the decision making behind the retirement strategy, this can lead to long term disagreement and stress. It is important that, whenever possible, the family be on the same page and mutually supportive of the decision, given an analysis of benefits and potential alternatives. A mutual understanding can help to provide long term peace of mind.

How to select the best reverse mortgage lender, with the best features and rate

Currently, there are 3 reverse mortgage lenders in Canada:

While this isn’t a ton of choice compared to the rest of the mortgage market, there are differences between these lenders. 

At Altrua Financial, we study these changing differences on a daily basis and are experts when it comes to placing you with the best fit lender.

These differences include:

Maximum loan amount – based on age

Rate – They change frequently, and often, there is a rate special at one lender. Rates can be lower rates up front and higher rates long term. A lender can have a lower long term rate even though not the lowest up front.

Origination Costs – The costs for approving the mortgage can vary. In many cases, working with Altrua Financial can help you to reduce any fees further, if not completely.

Potential Penalty – Penalty calculations differ between lenders if the mortgage is paid out early, and there can be major differences. If the mortgage is broken within the first 3 years, the penalty can be higher. Typically after 5 years, the penalty is 3 months of interest, and after 10 years, there is no penalty for breaking the mortgage.

Property Location – Where a lender will approve a reverse mortgage varies across Provinces and can even depend on where in the province the property is located.

Flexibility – Flexibility in how the funds are drawn can vary between lenders.

Connect with us at Altrua to a personalized comparison based on your situation and get your best approval advice.

Reverse mortgage vs home equity line of credit (HELOC)

The reverse mortgage vs home equity line of credit (HELOC) question is a good one. 

Both have advantages and disadvantages, but there is one unique lender HELOC solution that we think wins on pretty much all fronts. Connect with us today to discuss who this lender is and the benefits.

Generally speaking though, the following advantages and disadvantages to the revere mortgage vs HELOC decision will apply:

HELOC

  • Needs to be fully approved like a regular mortgage based on income, credit and equity (can be a disadvantage if applying while income is lower after retirement)
  • There is a minimum monthly interest payment. So if $100,000 is eventually borrowed for example, at 6% interest the payment would be $500 per month (a disadvantage to those looking for payment freedom)
  • The rate is variable (usually offered at plime + 0.50%) and will fluctuate with Central Bank of Canada hikes and cuts over time. (disadvantage if payment stability is wanted)
  • Rate can be slightly lower than a reverse mortgage (advantage)
  • Typically a lower cost to set up and typically open for penalty free repayment at any time (more flexible than a reverse mortgage if repayment is possible before moving out of/selling the home or if funds are required for a shorter term)

Reverse Mortgage

  • Easier approval is mainly based on the homes equity, not on income or credit (advantage especially if applying during retirement)
  • Lenders can be more selective of the property type (disadvantage)
  • The mortgage does not mature and there is no repayment needed until you leave the home or if the home is sold. (advantage)
  • The overall lending costs can be higher for the flexibility of a payment free loan (advantage/ disadvantage)

Connect with us at Altrua today to see what option may be best for you, including more information about our special ‘hybrid reverse mortgage/ HELOC strategy’.