With a traditional mortgage, every homeowner knows their responsibilities as a borrower: make your payments on time! But with a reverse mortgage, where there are no payment obligations, what are a homeowner’s responsibilities?
At RetireBetter, Canada's largest reverse mortgage brokerage, we understand the importance of homeowners being well-informed about their obligations when opting for reverse mortgages. This article aims to shed light on these responsibilities and why they matter.
Background on Reverse Mortgages
Reverse mortgages have gained popularity among senior homeowners who are 55 years or older in Canada, offering them a way to tap into their home's equity without having to sell the home.
Essentially, a reverse mortgage is a loan that allows homeowners to convert a portion of their home's value into cash, which they can use for any purpose, such as long term care, paying off debts or home renovations.
A Quick Primer on Reverse Mortgages:
- Available for any homeowner over the age of 55, there are no income or credit requirements
- The reverse mortgage amount based on age, home appraisal and location, up to 59% of the home’s value
- Reverse mortgage funds are available lump sum or in installments, and can be used for any purpose
Learn More: How Does a Reverse Mortgage Work?
There are only 2 banks who offer reverse mortgages in Canada: HomeEquity Bank provides the CHIP Reverse Mortgage and Equitable Bank provides the Flex Reverse Mortgage. There are also a number of smaller, regional lenders who provide reverse mortgages but these 2 national banks dominate more than 99% of the Canadian reverse mortgage market.
Learn More: Can I Get a TD Reverse Mortgage?
In this article, we’ll focus on the homeowner’s duties and responsibilities under the CHIP Reverse Mortgage and the Flex Reverse Mortgage.
What are Your Reverse Mortgage Responsibilities?
Before you get a reverse mortgage loan from any lender, it's important to know and uphold your end of the deal. As a homeowner, with a reverse mortgage, here are your obligations:
- Paying Property Taxes: Just like any homeowner, those with reverse mortgages must make sure their property taxes are paid on time.
- Adequate Fire Insurance: Fire insurance protects both you and the lender from potential losses. It's not just a contractual obligation but a safety net for your most valuable asset.
- Maintain the Property: A well-maintained home retains its value, ensuring that the equity you're drawing from remains intact.
- No Subsequent Financing: Taking on additional financing or loans against your home reduces the amount of equity you have and can make it more difficult to meet your overall financial obligations.
Why Lenders Focus on the Property
When it comes to a homeowner’s responsibilities under a reverse mortgage, HomeEquity Bank and Equitable Bank place almost all of their focus on your property. They do this because your home is the only collateral these banks have and the lenders want to make sure your primary residence does not decrease in value.
A property with a reverse mortgage and decreasing value may require HomeEquity Bank and Equitable Bank to honor their No Negative Equity Guarantee, which protects the borrower from having to pay the bank if the loan amount is greater than the value of the home.
Learn More: What is a No Negative Equity Guarantee?
We typically advise clients that there are no income requirements to get a reverse mortgage. Still, we DO ask for some basic income documents from the homeowner. The reason we do this is because we are looking to make sure the homeowner has enough monthly income to pay for their living expenses along with the monthly property tax and maintenance costs.
What Happens if You Fail to Meet Your Reverse Mortgage Obligations?
If a homeowner does not meet their reverse mortgage loan obligations, HomeEquity Bank and Equitable have the following options:
- Provide a grace period to cure the default: The bank will notify you of the issue and give you a reasonable amount of time to fix the issue and provide them with proof you have fixed the issue.
- Cure the default themselves: The bank will pay to fix the issue themselves and add the amount paid to your reverse mortgage loan balance.
- Not offer a renewal: The bank will require you to pay off the reverse mortgage loan at the end of the current mortgage term.
- Call the loan: The bank will start enforcement steps, and will require repayment of the loan plus their legal fees to enforce.
Loss of Negative Equity Protection:
One of the key features of the CHIP Reverse Mortgage and the Flex Reverse Mortgage is the Negative Equity Guarantee, which as mentioned above, promises the homeowner that they will never owe more than the value of their home when paying off the reverse mortgage loan.
There is a condition for this protection though: the homeowner must meet their obligations under the reverse mortgage loan.
In other words, if a homeowner fails to meet their responsibilities under the reverse mortgage loan, they risk losing this negative equity guarantee and may be liable for any difference between the value of their home and the outstanding loan balance.
Importance of Communication:
No mortgage lender wants to have a loan that is in default. If you are having difficulty meeting your obligations under the reverse mortgage, you should keep an open line of communication.
If you foresee challenges in meeting any obligation, it's better to discuss it proactively with your lender since they may be able to come up with a solution to help address the issue.
If you are not comfortable having this type of a discussion with your lender, then you should consider contacting a reverse mortgage specialist or a lawyer who can speak on your behalf.
It’s important for homeowners to understand and follow their obligations under a reverse mortgage loan. By doing so, it ensures a homeowner will enjoy their experience with a reverse mortgage and have a stress-free retirement.
If you are unsure about how to meet your obligations under a reverse mortgage, or are facing a situation where you cannot meet your reverse mortgage responsibilities, be sure to speak to a reverse mortgage expert who can guide you every step of the way.