The reverse mortgage market in Canada saw a growth of 35% in 2022, according to the Office of the Superintendent of Financial Institutions. This financial tool is becoming increasingly popular among homeowners over 55, providing them with a way to tap into their home equity without having to sell their property. However, understanding the repayment process of reverse mortgages is crucial for anyone considering this option.
In this article, we will discuss how to repay a reverse mortgage, prepayment penalties and the benefits and drawbacks of early repayment.
Understanding Reverse Mortgages
A reverse mortgage is a loan that allows homeowners to convert a portion of their home equity into cash. Unlike a traditional mortgage, where the homeowner makes payments to the lender, in a reverse mortgage, the lender makes payments to the homeowner. The loan is repaid when the homeowner sells the house, moves out, or passes away.
For more detailed knowledge about reverse mortgages, you can refer to our comprehensive guide to Canadian reverse mortgages.
When to Repay a Reverse Mortgage
Repayment of a reverse mortgage is typically triggered under three circumstances: when the homeowner decides to sell the house, moves out, or passes away.
In the event of the homeowner's death, the responsibility of repayment falls on the heirs. It's important to note that the heirs will never owe more than the home's fair market value, thanks to the "non-recourse" feature of reverse mortgages in Canada.
How to Repay a Reverse Mortgage
There are several ways to repay a reverse mortgage:
1. Selling the Home: The most common way to repay a reverse mortgage is by selling the home. The proceeds from the sale are used to pay off the reverse mortgage, with any remaining funds going to the homeowner or their heirs.
2. Refinancing the Mortgage: Homeowners or heirs can choose to refinance the reverse mortgage with a traditional mortgage or another reverse mortgage. While this could result in a lower interest rate being charged on the loan, it would create the need for the homeowners to start making monthly payments. It would also require the homeowner to have enough income to qualify for the mortgage, which might be difficult if they are on pension income. For the heirs, it’s unlikely they would qualify on their own for a reverse mortgage due to the age requirement of being at least 55. They would need to focus on refinancing with a traditional mortgage.
3. Paying Out of Pocket: If the homeowner or their heirs have sufficient funds, they can choose to pay off the reverse mortgage out of pocket. This can be a good option if the homeowner has other assets or investments that they can use.
Prepayment Penalties and Considerations
Prepayment penalties are fees that may be charged if you pay off your reverse mortgage before you or the last homeowner dies. The specifics of these penalties can vary based on the lender and the terms of the reverse mortgage.
Here are the prepayment penalties for the two major lenders in Canada, CHIP and Equitable Bank:
Both lenders waive all prepayment penalties after 10 years. Both lenders also do not charge prepayment penalties after the last of the homeowners dies meaning the heirs do not have to pay a prepayment penalty.
CHIP reverse mortgages will reduce the prepayment penalty by 50% when the last homeowner moves into a retirement home. These penalties are important to consider when deciding whether to repay a reverse mortgage early. It's always a good idea to consult with a financial advisor or mortgage professional to understand the specifics of your situation.
These penalties are also a reason why you should work with an experienced reverse mortgage specialist who can explain everything in detail, and present you with the best lender match for your particular circumstances.
Pros and Cons of Repaying a Reverse Mortgage Early
Repaying a reverse mortgage early can have both benefits and drawbacks. On the one hand, early repayment can potentially save you money in interest over the long term.
On the other hand, prepayment penalties can make early repayment costly. It's important to weigh these pros and cons carefully before deciding to repay a reverse mortgage early.
1. Can I ever fully pay off a reverse mortgage?
Yes, a reverse mortgage can be fully paid off either through the sale of the home, refinancing, or out-of-pocket payment.
2. What happens if I move out of my home?
If you move out of your home, the reverse mortgage becomes due and must be repaid.
3. Can my heirs keep or sell the home?
Yes, your heirs can choose to either keep the home and pay off the reverse mortgage or sell the home to repay the loan.
4. Can I negotiate a reverse mortgage payoff?
It's possible to negotiate the terms of a reverse mortgage, but it depends on the lender's policies.
5. What happens if I inherit a house with a reverse mortgage?
If you inherit a house with a reverse mortgage, you will need to repay the loan. This can be done by selling the home, refinancing the loan, or paying it off with other funds.
6. How much money can I get from a reverse mortgage?
The amount of money you can get from a reverse mortgage depends on several factors, including your age, the value of your home, and the terms of the loan.
Understanding the repayment process of a reverse mortgage is crucial for homeowners considering this financial tool. Whether you choose to sell your home, refinance the mortgage, or pay out of pocket, being aware of the potential prepayment penalties can help you make an informed decision.
At RetireBetter, we have completed more reverse mortgage transactions than any other brokerage in Canada since 2016. For personalized advice and assistance with reverse mortgages, including choosing the best reverse mortgage lender for your particular circumstances, don't hesitate to contact us.