Reverse Mortgages in Canada vs the United States
As homeowners age, many want to access home equity to support their retirement or pay for unexpected expenses. One way to do this is through a reverse mortgage, which allows homeowners to borrow against the value of their homes without selling or moving out.
With many people researching reverse mortgages online, it's essential to understand that they can vary significantly between Canada and the United States. In this article, we will explore the key differences between reverse mortgages in Canada and the United States and show why it's essential for seniors to know these differences.
Eligibility Requirements
The first significant difference between reverse mortgages in Canada and the United States is the age requirement. In Canada, borrowers must be at least 55 years old to qualify for a reverse mortgage, while in the United States, the minimum age is 62. Canadian seniors may have access to a reverse mortgage at an earlier age than their American counterparts.
Another difference in eligibility requirements is the need for a financial assessment in Canada. As of 2018, Canadian lenders must conduct an economic evaluation of borrowers to ensure they can pay for property taxes, home insurance, and other necessary expenses. This assessment is not required in the United States.
To be eligible, homeowners in the United States must complete a counselling session; Canadian homeowners do not have this requirement but must receive independent legal advice.
Loan Amounts
In Canada, homeowners can borrow up to 55% of the appraised value of their homes. Lenders may have internal loan limits, but they can make exceptions. Canadian seniors may access more funds through a reverse mortgage than their American counterparts.
Learn More: Canadian Reverse Mortgage Calculator
In the United States, there is a cap on loan limits imposed by the Federal Housing Authority (FHA), regardless of the property's appraised value. As of January 2023, the FHA mandated that reverse mortgages could not exceed $1,089,300.
Interest Rates
Interest rates for reverse mortgages in Canada and the United States can vary depending on the lender, the type of loan, and current market conditions. In general, however, interest rates for Canadian reverse mortgages are slightly higher than those in the United States.
The main reason for this pricing difference is that the reverse mortgage market in the United States is more prominent, more competitive and generally has access to cheaper sources of capital.
Reverse mortgages in both countries can be fixed or variable-rate mortgages.
Learn More: Reverse Mortgage Interest Rates in Canada
Fees
Fees associated with reverse mortgages in Canada and the United States can also vary depending on the lender and the type of loan. However, there are a few key differences to be aware of.
In Canada, there is typically a lender setup fee of around $1,500 to $2,500, regardless of the loan size. Legal fees are insignificant, and borrowers can pay legal fees from the loan proceeds. The appraisal is the only item that needs to pay out of pocket.
In the United States, origination fees are capped at 2% of the loan amount, with a maximum of $6,000. Borrowers will only pay up to $6,000 in origination fees, regardless of the size of their loan.
Learn More: Reverse Mortgage Fees & Costs in Canada
Repayment
The repayment process for reverse mortgages in Canada and the United States is also different. In both countries, the loan balance is due once the borrower moves out of the home or passes away. However, there are some critical differences in how the repayment process works.
In Canada, borrowers can make payments on the loan, either in part or lump sum, at any time. By making partial payments, the borrower can reduce the overall interest charges of the reverse mortgage. If a borrower wants to fully pay off the reverse mortgage during its term, a prepayment penalty may apply (similar to prepayment penalties with regular mortgages).
In the United States, borrowers are not required to make any payments on the loan, but they can if they choose to do so. However, if they make payments, they may be able to borrow more money in the future, as the available funds are based on the equity in the home.
Term
In Canada, reverse mortgages are available for six months to five years. Depending on the term, they can receive a closed or open mortgage. The borrower can choose a fixed or variable interest rate regardless of the term. At the end of a term, the borrower renews the loan for another term.
In the United States, lenders treat the reverse mortgage term concept differently: borrowers can choose to receive their funds at the beginning or over a certain period. In this latter instance, it is possible to "outlive your reverse mortgage."
Number of Lenders
In Canada, two lenders provide reverse mortgages nationwide: HomeEquity Bank and Equitable Bank. HomeEquity Bank is Canada's dominant lender and has provided the CHIP reverse mortgage for over 25 years. In the United States, many financial institutions provide reverse mortgages in approximately 50 states.
Why Knowing These Differences is Important
As we've seen, there are several key differences between reverse mortgages in Canada and the United States. For seniors considering a reverse mortgage, it's essential to understand these differences to decide which option is best for them.
Canadians need to know these differences because much of the online information about reverse mortgages comes from American sources—almost 50% of the top-ranked Google reverse mortgage content comes from American sources. For Canadian seniors who want to learn about the reverse mortgage option, this can create a confusing and frustrating experience.
For example, American seniors may be eligible for a reverse mortgage at a later age than Canadian seniors, or they may be able to access more funds through the program. Conversely, Canadian seniors may have more options for paying off their loans or may be subject to higher interest rates.
Understanding these differences allows seniors to decide whether a reverse mortgage is right for them and which program will best meet their needs.
Learn more: How a Reverse Mortgage Works in Canada
FAQ
Q: What is a reverse mortgage?
A: A reverse mortgage is a loan that allows homeowners to borrow against the equity in their homes without having to sell or move out. The loan balance is due once the borrower moves out of the house or passes away.
Q: What is the age requirement for a reverse mortgage in Canada and the United States?
A: In Canada, borrowers must be at least 55 years old to qualify for a reverse mortgage, while in the United States, the minimum age is 62.
Q: How much can I borrow through a reverse mortgage?
A: In Canada, homeowners can typically borrow up to 55% of the appraised value of their homes. You can use an online reverse mortgage calculator to get an initial estimate of your loan amount eligibility. In the United States, the maximum loan amount is based on the borrower's age, the value of their home, and current interest rates.
Q: Are there fees associated with reverse mortgages?
A: Yes, there are fees associated with reverse mortgages in both Canada and the United States. These fees can include origination, legal, and appraisal fees.
Q: Do I have to make payments on a reverse mortgage?
A: In Canada and the United States, borrowers are not required to pay on loans. However, in Canada, borrowers can make payments on the loan, while in the United States, payments are optional.
Q: If I live in Canada, can I get a reverse mortgage from a lender in the United States?
A: Lenders in the United States cannot provide reverse mortgages to Canadians and vice versa. Both countries have regulations for reverse mortgages.
Conclusion
Reverse mortgages can be valuable for seniors seeking home equity to support their retirement or pay for unexpected expenses. However, it's essential to understand that reverse mortgages can vary significantly between countries, including Canada and the United States. By understanding the critical differences between these two programs, seniors can make an informed decision about which option is right for them and ensure that they take advantage of the benefits of a reverse mortgage while minimizing potential risks or drawbacks.
Suppose you're considering a reverse mortgage to continue living in your home. In that case, you need to work with a licensed mortgage brokerage that specializes in these types of loans and can explain the difference from a traditional mortgage. Retire Better is dedicated to helping seniors access home equity through reverse mortgages. We can help you navigate the process, understand how reverse mortgages work, and find the best program for your needs.
We understand that reverse mortgages can be complex and confusing, so we take the time to explain the process and answer any questions you may have. We believe in transparency and honesty and always put our clients' best interests first.
Contact us today to learn how a reverse mortgage can help you retire better.
