Reverse mortgages have been gaining popularity in Canada, with a 35% growth in 2022 according to the Office of the Superintendent of Financial Institutions.
While they are commonly used to consolidate debt or fund renovations, reverse mortgages can also be used to buy a home. This article aims to educate homeowners over the age of 55 about the process, benefits, and misconceptions of buying a home with a reverse mortgage.
- To buy a home with a reverse mortgage, you can get a maximum loan amount of 55% of the purchase price, and the balance of the purchase price will need to come from your savings or the sale proceeds of your existing home.
- The main advantages of using a reverse mortgage to purchase a home include not needing to make monthly payments, qualifying for a larger loan amount than traditional mortgages, and less savings required to complete the purchase.
- Both HomeEquity Bank and Equitable Bank allow you to purchase a home using a reverse mortgage.
What is a Reverse Mortgage?
The typical description of a reverse mortgage is a loan that allows homeowners to access a portion of their home's equity without having to sell the property.
But in the scenario of a home purchase, you will likely be selling your home, so in this case, it’s likely better to describe a reverse mortgage as a loan that does not require monthly payments, and the loan is repaid when the homeowner sells the home or passes away.
Read more about how a reverse mortgage works in Canada.
How to Buy a Home with a Reverse Mortgage
To buy a home with a reverse mortgage, you can get a maximum loan amount of 55% of the purchase price. In most cases, you will be approved for 15%-35% of the purchase price.
The balance of the purchase price will need to come from your savings or the sale proceeds of your existing home. You will also need to have sufficient funds for closing costs such as land transfer tax and legal costs.
To determine your eligible amount for a reverse mortgage, you can start by using an online reverse mortgage calculator but you should consult with a reverse mortgage specialist once you get serious about the process.
Here are factors that generally affect your new reverse mortgage approval amount:
- Your age
- The marketability of the new home's location
- Your existing credit
We discuss each of these factors below.
Factors to Consider When Buying a Home with a Reverse Mortgage
When buying a home with a reverse mortgage, consider factors such as your age, the new home's location, and your financial situation.
The older you are, your reverse mortgage approval amount will get closer to the maximum approval amount of 55% of the new home’s value. If you are buying the property with a spouse or partner who is younger than you, then the younger person’s age will decrease your overall loan amount. Your new reverse mortgage approval amount will also benefit if you are buying in an urban location, or at least a location that is marketable with steady selling and buying activity. As you approach less marketable locations, lenders will start to scale back your loan approval amount.
If you have poor credit, you will likely not be eligible for the maximum loan amount as lenders typically require a minimum score for their “max loan” products. Also, if you have a history of not paying your property taxes on time, your total loan amount can be decreased by the lender. Alternatively, the lender may not reduce your overall loan amount but may hold back a portion of funds in case you are late making your property tax payments.
While rarely an issue, you should check to make sure the property you are going to buy is eligible for a reverse mortgage. For example, you cannot buy a mobile home on leased land with a reverse mortgage. You can check with a reverse mortgage specialist if you are not sure about your property’s eligibility for a reverse mortgage.
Benefits of Buying a Home with a Reverse Mortgage
The main advantages of using a reverse mortgage to purchase a home include:
- No need to make monthly mortgage payments
- Qualifying for a larger loan amount than traditional mortgages, as it is not dependent on income
- Less Savings required to complete the purchase
For more information about the pros and cons of reverse mortgages, you can read our detailed article about the benefits of reverse mortgages.
We’ll go into more details regarding income qualification when we compare reverse mortgages to traditional mortgages and home equity lines of credit (HELOCs) below.
Common Misconceptions About Reverse Mortgages
Some common myths about reverse mortgages include:
- The bank will own your home: In reality, you retain ownership of your home and can live in it as long as you want.
- You will owe more than your home is worth: Reverse mortgages have a non-recourse feature, meaning you will never owe more than the fair market value of your home, regardless of how long you keep your reverse mortgage.
Read more on the Common Misconceptions about Reverse Mortgages.
Comparing Reverse Mortgages to Traditional Mortgages and HELOCs
Almost all of our reverse mortgage clients start by asking us about their traditional mortgage and HELOC options! We understand the thinking behind their questions: these are familiar products offered by familiar lenders—and everyone thinks reverse mortgage rates are criminally high!
Once we start the process though, it quickly becomes obvious to our clients that they will not qualify for the amount they want—or need, in order to purchase the types of homes they are looking at.
While traditional mortgages and HELOCs may have lower interest rates, they require monthly payments and sufficient income to qualify. Older buyers on a pension may not qualify for a large enough mortgage or HELOC to buy a suitable home, making reverse mortgages a more viable option. If you want to read more about this topic, you can read our article on the differences between reverse mortgages and HELOCs.
Reverse Mortgage Lenders in Canada
HomeEquity Bank and Equitable Bank are the two major reverse mortgage lenders in Canada. Both allow reverse mortgages to be used to buy a home, but Equitable Bank only lends in certain provinces, while HomeEquity Bank lends across Canada.
Their loan amounts, setup fees, and interest rates can also differ. They are not the only reverse mortgage lenders in Canada though. Working with a mortgage broker specializing in reverse mortgages, such as RetireBetter, can help you determine the best lender option for your circumstances.
Buying a Second Home with a Reverse Mortgage
It is possible to buy a second home with a reverse mortgage. However, in this case, the reverse mortgage approval amount will be based on the value of your existing home (determined by a home appraisal) that you are keeping, and you will need to pay off any existing mortgages on the property when you get your reverse mortgage.
The net reverse mortgage funds (the amount available after your existing mortgage, if any, has been paid off), combined with your available savings, can be used to purchase the second home.
Buying a New Home with a Reverse Mortgage
You can also buy a new home with a reverse mortgage, as the reverse mortgage lender is not concerned with whether the home being bought is an existing home or a newly built home.
Buying a home with a reverse mortgage can be a viable option for anyone over the age of 55. In order to buy a home in this manner, you will need to have significant savings or sale proceeds available, as the reverse mortgage loan will less than 55% of the value of the new home you wish to buy.
By understanding the process, benefits, and misconceptions, you can make an informed decision about whether this option is right for you. Contact RetireBetter today for more information and assistance with reverse mortgages.
Q: How accurate are the online reverse mortgage calculators?
A: The HomeEquity Bank and Equitable Bank reverse mortgage calculators are fairly accurate but you should speak to reverse mortgage specialists if you have poor credit or are buying a home with a younger spouse or partner.
Q: Can I buy a home with a reverse mortgage and rent out the basement?
A: As long as you live in the home, you can buy it with a reverse mortgage. You can then rent out a room or the basement to suit your needs.
Q: What should I do not qualify for enough of a reverse mortgage to buy a home?
A: You should speak to a mortgage broker who specializes in reverse mortgages. They may work with additional reverse mortgage lenders or have additional strategies that might provide you with the amount of loan you are looking for.
Q: Can I buy a second home and put a reverse mortgage on it?
A: No, a reverse mortgage can only be put on your primary residence. It cannot be put on vacation homes or rental properties.